Question

Juarez Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs $2.00 a pound to make and sells for $3.20 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for $5.30 per jar. This further processing requires 1/4 pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to $2.10 per jar. Variable selling costs are $0.50 per jar. If the decision were made to cease production of the silver polish, $8,900 of Mixing Department fixed costs could be avoided. Juarez has limited production capacity for Grit 337, but unlimited demand for the cleaning powder.

Required:
Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Minimum number of jars = ?

Answer 1

4,684 jars

Step-by-step explanation:

The computation of the minimum number of jars is shown below:

Minimum number of jars = Fixed cost ÷ Contribution margin per unit

where,

Fixed cost is $8,900

And,

Contribution margin per unit is

Sales revenue per jar $5.30

Less: Sales revenue lost per jar ($3.20 × 1 ÷ 4) $0.8

Net sales revenue per jar $4.50

Les: Variable processing cost per jar $2.10

Less: Variable selling cost per jar $0.50

Contribution margin per jar $1.90

Based on this, the minimum number of jars is

= $8,900 ÷ $1.90

= 4,684 jars