Bonita Household Products Co. is a diversified household-cleaner processing company. The company's St. Lawrence plant produces two products from a common set of chemical inputs (TLC): a glass cleaner and a metal cleaner. Each week 30,000 litres of chemical input are processed at a cost of $200,000 into 20,000 litres of metal cleaner and 10,000 litres of glass cleaner. The metal cleaner has no market value until it is converted into a polish with the trade name MetalShine. The additional processing costs for this conversion total $270,000. MetalShine sells for $15 per 750-ml bottle.
The glass cleaner can be sold for $24 per 750-ml bottle. However, the glass cleaner can be converted into two other products by adding 10,000 litres of another compound (MST) to the 10,000 litres of glass cleaner. This joint process will yield 10,000 litres each of plastic cleaner and plastic polish. The additional processing costs for this process total $140,000. Both plastic products can be sold for $20 per 750-ml bottle.
The company decided not to process the glass cleaner into plastic cleaner and plastic polish based on the following analysis:

aIf the glass cleaner is not processed further, it is allocated one quarter of the $200,000 of TLC cost, because it represents one quarter of the total physical output.
bIf the glass cleaner is processed further, the total physical output is 40,000 litres. Plastic cleaner and plastic polish combined account for 40% of the total physical output and are each allocated 20% of the TLC cost.
Instructions
(a) Do the following to determine whether management made the correct decision by not processing the glass cleaner further:
1. Calculate the company's total weekly gross profit assuming the glass cleaner is not processed further.
2. Calculate the company's total weekly gross profit assuming the glass cleaner is processed further.
3. Compare the resulting net incomes and comment on management's decision.
(b) Using incremental analysis, determine whether the glass cleaner should be processed further.

Transcribed Image Text:

Process Further Glass Plastic Plastic Polish Total Cleaner (10,000) Cleaner 10,000 Production in litres Revenue TLC cost MST cost Total costs 10,000 $240,000 $200,000 $200,000 $400,000 50,000 80,000b 40,000 70,000 110,000 40,000 70,000 110,000 90,000 $180,000 140,000 220,000 50,000 Weekly gross profit $190,000 S 90,000