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Required:: Answer: The Incremental Revenue Per Jar of Polish Is P350

The document describes a company that produces a cleaning powder called Gleam and a silver polish called Shine that is made by further processing some of the Gleam. It provides information on the costs of producing each and asks questions to determine if it is more profitable to sell all the Gleam as a powder or further process some into Shine. Specifically, it asks how much incremental revenue and contribution margin is earned per jar of Shine compared to Gleam, how many jars must be sold each month to offset avoidable fixed costs of producing Shine, and what the financial advantage is if different numbers of jars are sold.

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60 views

Required:: Answer: The Incremental Revenue Per Jar of Polish Is P350

The document describes a company that produces a cleaning powder called Gleam and a silver polish called Shine that is made by further processing some of the Gleam. It provides information on the costs of producing each and asks questions to determine if it is more profitable to sell all the Gleam as a powder or further process some into Shine. Specifically, it asks how much incremental revenue and contribution margin is earned per jar of Shine compared to Gleam, how many jars must be sold each month to offset avoidable fixed costs of producing Shine, and what the financial advantage is if different numbers of jars are sold.

Uploaded by

Unknowingly Anonymous
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Practice Problems 2-Relevant Costing and Incremental Analysis

1. Cleaners Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While
most of its products are processed independently, a few are related, such as the company’s Gleam and its Shine silver polish.
Gleam is a coarse cleaning powder with many industrial uses. It costs P 160 a pound to make, and it has a selling price of
P200 a pound. A small portion of the annual production of Gleam is retained in the factory for further processing. It is
combined with several other ingredients to form a paste that is marketed as Shine silver polish. The silver polish sells for P
400 per jar.

This further processing requires one-fourth pound of Gleam per jar of silver polish. The additional direct variable costs involved
in the processing of a jar of silver polish are:
Other ingredients P65
Direct labor 148

Overhead costs associated with processing the silver polish are:


Variable manufacturing OH cost 25% of direct labor cost
Fixed manufacturing OH cost (per month):
Production supervisor P300,000
Depreciation of mixing equipment 140,000

The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-
purpose equipment acquired specifically to produce the silver polish. It can produce up to 15,000 jars of polish per month. Its
resale value is negligible and it does not wear out through use. Advertising costs for the silver polish total P 400,000 per month.
Variable selling costs associated with the silver polish are 7.5% of sales.
Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable.
The sales manager feels that it would be more profitable to sell all of the Gleam as a cleaning powder.

Required:
1. How much incremental revenue does the company earn per jar of polish by further processing Gleam rather than
selling it as a cleaning powder?
CM of Gleam
Selling price P200 Selling price P400
Production costs (160) Selling price of ¼ pound Gleam (50)
CM per pound P40 Incremental revenue per jar of polish P350

Answer: The incremental revenue per jar of polish is P350.

2. How much incremental contribution margin does the company earn per jar of polish by further processing Gleam rather
than selling it as a cleaning powder?

Other ingredients P65


DL 148
VOH (148 x 25%) 37 Incremental revenue per jar of silver polish P350
Variable selling costs (400 x 7.5%) 30 Incremental VC per jar of silver polish (280)
Incremental VC per jar of silver polish P280 Incremental CM P70

Answer: The incremental contribution margin per jar of polish is P70.

3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce
and sell the polish? Explain.

Relevant costs associated w/ the production of sliver polish:


Production supervisor P300,000
Depreciation of mixing equipment 140,000
Avoidable fixed costs P440,000

Avoidable fixed costs P440,000


Incremental CM ÷ 70
Number of jars to be produced 5,500
Answer: Since the total avoidable costs is P440,000, we have to divide that amount by the
incremental contribution margin to exactly offset the avoidable fixed costs.
Therefore, the number of jars to be produced each month is 5,500 jars.

4. If the company sells 9,000 jars of polish, what is the financial advantage (disadvantage) of choosing to further process
Gleam rather than selling is as a cleaning powder?

Answer: The financial advantage of choosing to further process Gleam is P2,080,000.

5. If the company sells 11,500 jars of polish, what is the financial advantage (disadvantage) of choosing to further process
Gleam rather than selling is as a cleaning powder?

Answer: The financial advantage of choosing to further process Gleam is P2,780,000.

9,000 jars of polish 11,500 jars of polish


(9,000 x ¼); (11,500 x ¼) 2,250 pounds of Gleam 2,875 pounds of Gleam
Sales of silver polish @ P400 per jar P3,600,000 P4,600,000
Variable costs:
Production of Gleam @ P160 per pound 360,000 460,000
Further processing into silver polish @ P280 630,000 805,000
Contribution margin P2,610,000 P3,335,000

Avoidable FC
Production supervisor P300,000 P300,000
Depreciation of mixing equipment 140,000 140,000
Total P440,000 P440,000

Total contribution to common fixed costs P2,170,000 P2,895,000

Sales of Gleam @ P200 per pound P450,000 P575,000


Variable production cost @160 per pound (360,000) (460,000)
Contribution to common fixed expenses and net profit P90,000 P115,000

Total contribution to common fixed costs P2,170,000 P2,895,000


Contribution to common fixed expenses and net profit (P90,000) (P115,000)
Financial advantage of further processing Gleam P2,080,000 P2,780,000

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