Sutton Industrial Products Inc.

(SIPI) is a diversified industrial-cleaner processing

company. The company’s Verde plant produces two products: a table cleaner and a floor
cleaner from a common set of chemical inputs (CDG). Each week 900,000 ounces of
chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner
and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is
converted into a polish with the trade name Floor Shine. The additional processing costs
for this conversion amount to $240,000.
Floor Shine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $18 per 25-
ounce bottle. However, the table cleaner can be converted into two other products by
adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table

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cleaner.

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This joint process will yield 300,000 ounces each of table stain remover (TSR) and table
polish (TP). The additional processing costs for this process amount to $100,000. Both

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table products can be sold for $14 per 25-ounce bottle.
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The company decided not to process the table cleaner into TSR and TP based on the
following analysis.
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*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to
1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined
account for 50% of the total physical output and are each allocated 25% of the CDG cost.

Instructions

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 (a) Determine if management made the correct decision to not process the table cleaner
further by doing the following.
(1) Calculate the company’s total weekly gross profit assuming the table cleaner is not
processed further.
(2) Calculate the company’s total weekly gross profit assuming the table cleaner is
processed further.
(3) Compare the resulting net incomes and comment on management’s decision.
(b) Using incremental analysis, determine if the table cleaner should be processed further.

SOLUTION:

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(a) (1) Table Cleaner Not Processed Further

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Sales:
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FloorShine (600,000 ÷ 30) X $20 $400,000
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Table Cleaner (300,000 ÷ 25) X $18 216,000
Total revenue $616,000
Costs:
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CDG 210,000
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Additional costs of FloorShine 240,000

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Total costs 450,000

Gross profit $166,000
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(2) Table Cleaner Processed Further

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Sales:
FloorShine $400,000
Table Stain Remover (300,000 ÷ 25) X $14 168,000
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Table Polish (300,000 ÷ 25) X $14 168,000

Total revenue $736,000
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Costs:
CDG 210,000
Additional costs of FloorShine 240,000
TCP 100,000
Total costs 550,000
Gross profit $186,000

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 (3) If the table cleaner is processed further overall company profits will be $20,000
higher. Therefore, management made the wrong decision by choosing to not
process table cleaner further.

(b) Don’t Process Process Net Income

Table Cleaner Table Cleaner Increase
Further Further (Decrease)
Incremental revenue $216,000 $336,000 $120,000
Incremental costs 0 100,000 (100,000)
Totals $216,000 $236,000 $ 20,000

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When trying to decide if the table cleaner should be processed further into TSR and TP,

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only the relevant data need be considered. All of the costs that occurred prior to the

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creation of the table cleaner are sunk costs and can be ignored. The decision should be

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made by comparing the incremental revenue from further processing to the incremental
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costs.
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