Ohio Household Products Co. (OHPC) is a diversified household-cleaner processing company. The company's Mishawaka plant produces two products: an appliance cleaner and a general-purpose cleaner from a common set of chemical inputs (NPR). Each week 1,000,000 ounces of chemical input are processed at a cost of $200,000 into 750,000 ounces of appliance cleaner and 250,000 ounces of general-purpose cleaner. The appliance cleaner has no market value until it is converted into a polish with the trade name Shine Brite. The additional processing costs for this conversion amount to $300,000. Shine Brite sells at $15 per 25-ounce bottle. The general-purpose cleaner can be sold for $20 hper 20-ounce bottle. However, the general-purpose cleaner can be converted into two other products by adding 250,000 ounces of another compound (PST) to the 250,000 ounces of general-purpose cleaner. This joint process will yield 250,000 ounces each of premium cleaner (PC) and premium stain remover (PSR). The additional process- ing costs for this process amount to $140,000. Both premium products can be sold for $16 per 20-ounce bottle.
The company decided not to process the general-purpose cleaner into PC and PSR based on the following analysis.
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Process Further
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General-Purpose Cleaner
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PremiumCleaner (PC)
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Premium StainRemover (PSR)
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Total
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Production in ounces
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250,000
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250,000
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250,000
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Revenue
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$250,000
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$200,000
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$200,000
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$400,000
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Costs:
NPR costs
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50,000*
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40,000
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40,000
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80,000**
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PST costs
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0
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70,000
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70,000
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140,000
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Total costs
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50,000
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110,000
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110,000
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220,000
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Weekly gross profit
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$200,000
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$ 90,000
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$ 90,000
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$180,000
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*If general-purpose cleaner is not processed further, it is allocated 1/4 of the $200,000 of NPR cost, which is equal to 1/4 of the total physical output.
**If general-purpose cleaner is processed further, total physical output is 1,250,000 ounces. PC and PSR combined account for 40% of the total output and are each allocated 20% of the NPR cost.
Instructions
(a) Determine if management made the correct decision to not process the general-purpose cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is processed further.
(3) Compare the resulting net incomes and comment on management's decision.
(b) Using incremental analysis, determine if the general-purpose cleaner should be pro- cessed further.