Question

Wesco Incorporated’s only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores.

Zwinger Nursery plans to sell a similar fertilizer/weedkiller compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facilities of its own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 29,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing processes are very similar.

The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 35 direct labor-hours and the following chemicals:

Chemicals	Quantity in Pounds
AG-5	390
KL-2	270
CW-7	150
DF-6	190

The first three chemicals (AG-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less $0.12 per pound selling and handling expenses.

Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced. BH-3, which cannot be used in GrowNWeed, can be substituted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $420.

Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below:

Raw Material	Pounds in Inventory	Actual Price per Pound When Purchased		Current Market Price per Pound
AG-5	25,000	$	0.74	$	0.84
KL-2	5,100	$	0.43	$	0.48
CW-7	7,300	$	1.31	$	1.51
DF-6	4,110	$	0.54	$	0.53
BH-3	5,800	$	0.60	(Salvage)

The current direct labor wage rate is $14 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two-shift capacity with no overtime, is as follows:

Variable manufacturing overhead	$	5.10	per DLH
Fixed manufacturing overhead		6.90	per DLH
Combined predetermined overhead rate	$	12.00	per DLH

Wesco’s production manager reports that the present equipment and facilities are adequate to manufacture the Zwinger compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs. However, Wesco is within 120 hours of its two-shift capacity this month. Any additional hours beyond the 120 hours must be done in overtime. If need be, the Zwinger compound could be produced on regular time by shifting a portion of GrowNWeed production to overtime. Wesco’s direct labor wage rate for overtime is $21 per hour. There is no allowance for any overtime premium in the predetermined overhead rate.

Required:

1. Wesco has decided to submit a bid for the 29,000 pound order of Zwinger’s new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order and still exactly cover its incremental manufacturing costs.

2. Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 29,000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two-shift capacity. However, production could be scheduled so that 60% of each Zwinger order could be completed during regular hours. As another option, some GrowNWeed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices.

Wesco’s standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 29,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed.

Required 1:

Wesco has decided to submit a bid for the 29,000 pound order of Zwinger’s new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order and still exactly cover its incremental manufacturing costs. (Round all intermediate calculations and final answer to 2 decimal places.)

Required 2:

Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 29,000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two-shift capacity. However, production could be scheduled so that 60% of each Zwinger order could be completed during regular hours. As another option, some GrowNWeed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices.
Wesco’s standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 29,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. (Round your intermediate DLHs to the nearest whole hour. Round all other intermediate calculations and final answers to 2 decimal places.)

Answer 1

Part 1	The Minimum price bid that Wesco can offer for 29,000 pounds of zwinger is $43,454, relevant breakup is given below.
	Direct materials:
	AG-5: 390 pounds per lot x 29 lots = 11,310 pounds. Substitution of BH-3 on a one-for-one basis to its total of 5,800 pounds. BH3 has no other use, and can only be salvaged, so its salvage value of $420 is relevant cost.	$        420.00
	The balance 5,510 pounds used would be AG-5 at a cost of $0.84 per pound	$    4,628.40
	KL-2: 270 pounds per lot X 29 lots = 7,830 pounds at $0.48 per pound	$    3,758.40
	CW-7: 150 pounds per lot X 29 lots = 4,350 pounds at $1.51 per pound	$    6,568.50
	DF-6: 190 pounds per lot X 29 lots = 5,510 pounds. Use 4,110 pounds in inventory at $0.41 per pound ($0.53 mar-ket price - $0.12 handling charge), and purchase the re-maining 1400 pounds at $0.53 per pound	$    2,427.10
	Total direct materials cost	$ 17,802.40
	Direct labor used: 35 DLHs per lot x 29 lots = 1015 Direct Labor Hrs. Because only 120 hours can be scheduled during regular time this month, overtime would have to be used for the remaining 895 hours.
	120 DLHs X $14.00 per DLH	$    1,680.00
	895 DLHs x $21.00 per DLH	$ 18,795.00
	Total direct labor cost	$ 20,475.00
	Overhead: Only variable overhead will be considered, fixed overhead will not change by this order.
	1015 DLHs × $5.10 per DLH	$    5,176.50
	Total relevant cost of the special order	$ 43,453.90
Part 2	In this part of answer , we will calculate the total cost of regular orders of 29,000 pounds
	Direct materials: Since Old inventory of BH-3, and DF-6 exhausted in special order, now all material used will be fresh, so only market price is relevant cost.
	AG-5: 11,310 pounds x $0.84 per pound	$    9,500.40
	KL-2: 7,830 pounds x $0.48 per pound	$    3,758.40
	CW-7: 4,350 pounds x $1.51 per pound	$    6,568.50
	DF-6: 5,510 pounds X $0.53 per pound	$    2,920.30
	Total direct materials cost	$ 22,747.60
	Direct labor: 60% regular hours (i.e., 609 DLHs) of the production of a batch can be used; and remaining production to be scheduled (i.e, 406 DLHs) on overtime.
	Regular time 609 DLHs x $14.00 per DLH	$    8,526.00
	Overtime premium 406 DLHs x $21.00 per DLH	$    8,526.00
	Total direct labor cost	$ 17,052.00
	Overhead: It includes both fixed and variable cost overhead
	Manufacturing overhead applied:
	1015 DLHs X $12.00 per DLH	$ 12,180.00
	Full manufacturing cost	$ 51,979.60
	Markup (40% x $51,980)	$ 20,791.84
	Selling price (Cost + Markup)	$ 72,771.44