Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner

P7-3A Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan 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.

FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 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 cleaner.

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 table products can be sold for $14 per 25-ounce bottle.

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

Process Further

Table Stain

Table               Remover          Table Polish

Cleaner            (TSR)               (TP)                             Total

Production in ounces               300,000           300,000           300,000

Revenue                                  $204,000         $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                 $134,000         $ 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 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

Instructions(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.

(CMA adapted)

(2) Gross Profit $186,000

TUTORIAL PREVIEW

(a) (1)

	Table Cleaner Not Processed Further
Sales:
FloorShine (600,000 ÷ 30) X $20		$400,000
Table Cleaner (300,000 ÷ 25) X $17		204,000

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The following data relate to the operations of Shilow Company

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods: 

 

 

P9-19 Shilow Company

 

 

Current assets as of March 31:

     Cash                                               $8,000  

     Accounts receivable                       $20,000

     Inventory                                        $36,000

  Buildings and equipment, net            $120,000

  Accounts payable                              $21,750  

  Capital stock                                      $150,000  

  Retained earnings                              $12,250

 

a. The gross margin is 25% of sales.

b. Actual and budgeted sales data:

March (actual)             $50,000  

  April                          $60,000  

  May                           $72,000  

  June                           $90,000  

  July                            $48,000

 

c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.

d. Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold.

e. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets.)

g. Equipment costing $1,500 will be purchased for cash in April.

h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

 

Requirement 1:

1. Complete the following schedule using the above data.

 

Requirement 2:

Complete the following using the above data

 

Requirement 3:

Complete the following using the above data.

 

Requirement 4:

Complete the following cash budget using the above data.

 

Requirement 5:

Prepare an absorption costing income statement, for the quarter ended June 30. 

 

Requirement 6:

Prepare a balance sheet as of June 30.

 

 

TUTORIAL PREVIEW

			SHILOW COMPANY
			Schedule of Expected Cash Collections
		April	May	June	Quarter
Cash sales		$36,000	43200	54000	$133,200
Credit Sales		20,000	24000	28800	$72,800
Total collections		$56,000	67200	82800	$206,000
			Correct!	Correct!	Correct!

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