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 32,000-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 38 direct labor-hours and the following chemicals:

Chemicals	Quantity in Pounds
AG-5	310
KL-2	200
CW-7	160
DF-6	330

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 $0.10 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 $520.

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	20,000	$	0.77	$	0.87
KL-2	4,900	$	0.43	$	0.48
CW-7	8,500	$	1.25	$	1.45
DF-6	9,260	$	0.47	$	0.53
BH-3	6,400	$	0.74	(Salvage)

The current direct labor wage rate is $12 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	$	4.90	per DLH
Fixed manufacturing overhead		8.10	per DLH
Combined predetermined overhead rate	$	13.00	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 330 hours of its two-shift capacity this month. Any additional hours beyond the 330 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 $18 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 32,000 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 32,000-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 32,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed.

Wesco has decided to submit a bid for the 32,000 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.)

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	Lowest price (32,000 pound bid)

Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 32,000-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 32,000 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.)

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	Selling price (32,000 pound bid)

Answer 1

Computation of Lowest Price for Bid
Cost of AG-5
AG-5: 310 pounds per lot × 32 lots	9920 Pound
Substitute BH-3 on a one-for-one basis to its total of 6400 pounds. If BH-3 is not used in this order, it will be salvaged for $520. Therefore, the relevant cost	$520.00
The remaining 3520 pounds would be AG-5 at a cost of (3520 X $0.87)	$3,062.40	$3,582.40
KL-2: (200 pounds per lot × 32 lots X $0.48)		$3,072.00
CW-7: (160 pounds per lot × 32lots X$1.45)		$7,424.00
Cost of DF-6
DF-6: 330 pounds per lot × 32 lots = 10560 pounds. Use 9260 pounds in inventory at $0.43 per pound ($0.53market price – $0.10 handling charge)	$39,818.80
Remaining (10560-9260) Pound Procured @ $0.53	$689.00	$40,507.80
Total Direct Material Cost (A)		$54,586.20
Direct labor: (38 DLH X 32 lot=1216DLH)
330 DLHs × $12.00 per DLH	$3,960.00
886 DLHs × $18.00 per DLH	$15,948.00
Total direct labor cost (B)		$19,908.00
special order will not increase fixed overhead costs.
variable overhead is relevant. (1216 DLHX $4.90) ( C)		$4,586.40
Total relevant cost of the special order (A+B+C)		$79,080.60

2. Computaation of Selling Price
Direct Material Cost
AG-5: 9920 pounds × $0.87 per pound ............................	$8,630.40
KL-2: 6400 pounds × $0.48 per pound	$3,072.00
CW-7: 5120 pounds × $1.45 per pound	$7,424.00
DF-6: 10560 pounds × $0.53 per pound	$5,596.80
Total direct materials cost		$24,723.20
Direct Labour Cost
Regular time ( 1216 DLH X 60%X $12)	$8,755.20
Overtime premium ( 1216 DLH X40%X$18)	$8,755.20
Total direct labor cost .......................................................		$17,510.40
Manufacturing overhead applied (1216 DLH X $13)		$15,808.00
Total Manufacturing Cost		$58,041.60
Markup (40% × $58041.60)		$23,216.64
Selling price (full manufacturing cost plus markup)		$81,258.24