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 26,000-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 39 direct labor-hours and the following chemicals: Chemicals AG-5 KL-2 CW-7 DF-6 Quantity in Pounds 320 240 180 260 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 $0.09 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 $470. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: Raw Material AG-5 KL-2 CW-7 Pounds in Inventory 21,000 4,100 7.900 Actual Price per Pound When Purchased $ 0.77 $ 0.49 $ 1.37 Current Market Price per Pound $ 0.87 $ 0.54 $ 1.57

Answer 1

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Req 1
Salvage value of BH3	$               470
Cost of remaining AG5 used [(26 Lots*320 Pounds)-6,200 Pounds]*$0.87	$            1,844
KL 2: 240*26 Lots*$0.54	$            3,370
CW 7: 180*26 Lots*$1.57	$            7,348
DF-6: 260 Pound*26 lots=6,760 Pounds
(5,460 Inventory)*($0.59-$0.09 Handling charges)	$            2,730
Remaining 1,300 units*$0.59	$               767
Total direct materials cost	$         16,529
Direct Labor Hours 39 DLH*26 Lots=1,014 DLH
Normal Hours: 110, Hence Overtime 1,014-110=904
110 DLHs × $18.00 per DLH	$            1,980
904 DLHs × $27.00 per DLH	$         24,408
Total direct labor cost	$         26,388
Variable Overhead Cost:
1,014 DLHs × $3.70 per DLH	$            3,752
Total relevant cost of the special order=Minimum Price	$         46,668
Req 2
AG-5: 8,320 pounds × $0.87 per pound	$            7,238
KL-2: 6,240 pounds × $0.54 per pound	$            3,370
CW-7: 4,680 pounds × $1.57 per pound	$            7,348
DF-6: 6,760 pounds × $0.59 per pound	$            3,988
Total direct materials cost	$         21,944
60% is regual hours i.e. 1,014*60%=608 Regular and overtime is 1,014-608=406
608 DLHs × $18.00 per DLH	$         10,944
504 DLHs × $27.00 per DLH	$         13,608
Total direct labor cost	$         24,552
Overhead: The full manufacturing cost includes both fixed and variable manufacturing overhead.
Manufacturing overhead applied:
1,014 DLHs × $11.50 per DLH	$         11,661
Full manufacturing cost	$         58,157
Markup (40% × $58,157)	$         23,263
Selling price (full manufacturing cost plus markup)	$         81,420