Assignment: Decision-Making

In approximately 950 words respond to Part 1 and Part 2 accordingly:

Part 1

Seymore Industrial Products Inc. (SIPI) is a diversified industrial-cleaner processing company. The company's Brisbane plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000 grams of chemical input are processed at a cost of $210,000 into 600,000 grams of floor cleaner and 300,000 grams of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name StepShine. The additional processing costs for this conversion amount to $240,000.

StepShine sells at $20 per 30-gram bottle. The table cleaner can be sold for $18 per 25-gram bottle. However, the table cleaner can be converted into two other products by adding 300,000 grams of another compound (TCP) to the 300,000 grams of table cleaner. This joint process will yield 300,000 grams each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25-gram bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis:

Process Further

Table Cleaner Table Stain

Remover

(TSR) Table Polish (TP) Total

Production in grams 300,000 300,000 300,000

Revenue $216,000 $168,000 $168,000 $336,000

Costs:

CDG costs 70,000* 52,500 52,500 105,000**

TCP costs 0 50,000 50,000 100,000

Total costs 70,000 102,500 102,500 205,000

Weekly gross profit $146,000 $65,500 $65,500 $131,000

*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 grams. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

To complete Part 1:

• Determine if management made the correct decision to not process the table cleaner further by doing the following:

o Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.

o Calculate the company's total weekly gross profit assuming the table cleaner is processed further.

o Compare the resulting net incomes and comment on management's decision.

• Using incremental analysis, determine if the table cleaner should be processed further. Justify your response.

Part 2

The management of Gill Corporation is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called SIDI, is a component of the company's finished product.

The following information was collected from the accounting records and production data for the year ending 31 December 2014:

• 5,000 units of SIDI were produced in the Machining Department.

• Variable manufacturing costs applicable to the production of each SIDI unit were:

o direct materials $4.75 o direct labour $4.60 o indirect labour $0.45 o utilities $0.35

• Fixed manufacturing costs applicable to the production of SIDI were:

Cost item Direct Allocated

Depreciation $1,100 $900

Property taxes 500 200

Insurance 900 600

Total $2,500 $1,700

• All variable manufacturing and direct fixed costs will be eliminated if SIDI is purchased. Allocated costs will have to be absorbed by other production departments.

• The lowest quotation for 5,000 SIDI units from a supplier is $56,000.

• If SIDI units are purchased, freight and inspection costs would be $0.30 per unit, and receiving costs totalling $500 per year would be incurred by the Machining Department.

To complete Part 2:

• Prepare an incremental analysis for SIDI. Your analysis should have columns for (1) Make SIDI, (2) Buy SIDI and (3) Net Income Increase/Decrease.

• Based on your analysis, what decision should management make? Justify your response.

• Would the decision be different if Gill Corporation has the opportunity to produce $6,000 of net income with the facilities currently being used to manufacture SIDI? (Show computations.) Justify your response.

• What nonfinancial factors should management consider in making its decision and why?

Note: This assignment must adhere to the following:

• Include a cover sheet that contains your course name, your first and last name and student number.

• Clearly indicate question number and part thereof for each of your answers.

• Begin a new part on a new page.

• Submit as a Word document only; we will use track changes to provide feedback and grade your submission. Do not submit a pdf.

• To keep the size of your file small, minimise the number of pictures (if any) to a minimum.

• Do not take a screen shot of your Excel file (if used) and insert as a picture; please create a table within your Word document by copying and pasting over your Excel table.

• References use APA style as per text guide. If you use hyperlinks for referencing information, please include the hyperlink and name of site in your reference list.

• In text referencing, reference list, appendices and calculations not included in word count.