Question

Zylar Industries is a manufacturer of standard and custom-design bottling equipment. Early in December 20x9, Lyan company as Zylar to quote a price for a custom- designed bottling machine to be delivered in April, Lyan intends to make a decision on the purchase of such a machine by January 1, so Zylar would have the entire frit quarter of 20x1 to build the equipment.

Zylar’s pricing policy for custom-desighned equipment is 40 percent markup on absorption manufacturing cost. Lyan’s specification for the equipment hve been reviewed by Zylar’s Engineering and cost management departments which made the following estimates for direct material and labor

Direct material 258,000

Direct labor (12,600 hours at $18) 226,800

Manufacturing overhead is applied on the basis of direct-labor hours. Zylar normally plans to run its plant at a level of 17,000 direct labor hours per month and assigns overhead on the basis of 204,000 direct labor hours per year. The overhead application rate for 20x1 of $13 per hour is based on the following budgeted manufacturing overhead costs for 20x1.

Variable manufacturing overhead $1,591,200

Fix manufacturing overhead             1,060,800

Total Manufacturing overhead         2,652,000

Zylar’s production schedule calls for 13,800 direct-labor hours per month during the first quarter. If Zylar is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increase to 17,000 direct labor hours each month on short notice. Furthermore Zylars employees are unwilling to work overtime.

Sales of the standard product for which the production schedule would be reduced has a unit sales price of $13,800 and the following cost structure.

Direct material                                                     $2700

Direct labor   (300 hours a $18)                           5400

Manufacturing over head (300 hours at $13)    3,900

Total cost                                                                  12,000

Lyan needs the custom designed equipment to increase its bottle-making capacity it will not have to buy bottles from an outside supplier. Lyan company requires 5,170,000 bottles annually. Its present equipment has a maximum capacity of 4,560,000 bottles with a direct traceable cash ourlay of 24 cents per bottle. Thus Lyan had to purchase 610,000 bottles from a supplier at a savings of 1 cents per bottle. Zylar estimates that Lyan annual bottle demand will continue to be 5,170,000 bottles over the next five years, the estimated life of the special- purpose equipment.

Zylar industries plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.

Calculate the bid Zylar would submit if it follows its standard pricing policy for the special purpose equipment

2. Calculate the minimum bid Zylar would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1 (do not round intermediate calculations)

Answer 1