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P7-3B Ohio Household Products Co. (OHPC)

Price: $2.50


P7-3B 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 per 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 processing
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.



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 processed
further.

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