Come-Clean Corporation produces a variety of cleaning compounds including Grit 337 and Sparkle silver polish. Grit 337 is a coarse cleaning powder that costs $1.20 a pound to make and sells for $10.60 a pound. A small portion of Grit 337 is combined with several other ingredients and further processed into Sparkle silver polish. The silver polish sells for $6.00 per jar. This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional variable manufacturing costs per jar of silver polish are: Other ingredients $ 0.60 Direct labor 1.40 Additional variable manufacturing cost $ 2.00 Overhead costs associated with processing the silver polish are: Variable manufacturing overhead cost 25 % of direct labor cost Fixed manufacturing overhead cost (per month) Production supervisor $ 3,100 Depreciation of mixing equipment $ 1,600 The production supervisor has no duties other than overseeing production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 3,000 jars of polish per month. Its resale value is negligible and it does not wear out through use. Advertising costs for the silver polish total $3,900 per month. Variable selling costs for the silver polish are 5% of sales. Due to a decline in the demand for silver polish, the company is considering selling all of its Grit 337 for $10.60 per pound and discontinuing Sparkle silver polish. Required: How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Come-Clean Corporation produces a variety of cleaning compounds including Grit 337 and Sparkle silver polish. Grit 337 is a coarse cleaning powder that costs $1.20 a pound to make and sells for $10.60 a pound. A small portion of Grit 337 is combined with several other ingredients and further processed into Sparkle silver polish. The silver polish sells for $6.00 per jar.

This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional variable manufacturing costs per jar of silver polish are:

Other ingredients	$ 0.60
Direct labor	1.40
Additional variable manufacturing cost	$ 2.00

Overhead costs associated with processing the silver polish are:

Variable manufacturing overhead cost	25	% of direct labor cost
Fixed manufacturing overhead cost (per month)
Production supervisor	$ 3,100
Depreciation of mixing equipment	$ 1,600

The production supervisor has no duties other than overseeing production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 3,000 jars of polish per month. Its resale value is negligible and it does not wear out through use.

Advertising costs for the silver polish total $3,900 per month. Variable selling costs for the silver polish are 5% of sales.

Due to a decline in the demand for silver polish, the company is considering selling all of its Grit 337 for $10.60 per pound and discontinuing Sparkle silver polish.

Required:

How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder?
How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder?
How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish?
If the company sells 8,700 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling it as a cleaning powder?
If the company sells 10,400 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling it as a cleaning powder?

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