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 30,000-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 34 direct labor-hours and the following chemicals: Chemicals AG-5 KL-2 CW-7 DF-6 Quantity in Pounds 310 250 140 300 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 $0.08 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 $510. 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 DF-6 BH-3 Pounds in Inventory 20,000 5,900 7,800 7,600 5,400 Actual Price per Pound When Purchased $ 0.70 $ 0.46 $ 1.36 $ 0.53 $ 0.60 Current Market Price per Pound $ 0.80 $ 0.51 $ 1.56 $ 0.56 (Salvage)

Answer 1

1	Computation of lowest price for Bid
	Cost of AG-5
	AG-5 (310 pounds per lot *30 lot)	9300 pound
	Substitute BH-3 on a one -for-one basis to its total of 5400 pounds.	$510
	If BH-3 is not used in this order, it will be salvaged for $510.
	Therefore the relevant cost
	The remaining 3900 pounds would be AG-5 at a cost of (3900*0.80)	$3120	$3630
	Kl-2 (250 per lot *30 lot *.51)		$3825
	CW-7 (140 per lot *30 lot *1.56)		$6552
	Cost of DF-6
	DF-6 : 300 pounds per lot *30 lot = 9000 pounds. Use 7600 pounds in		$3648
	inventory at $.48 per pound (0.56-0.08 handling charges)
	Remaining pounds would be at a cost of (1400 pounds * $.56)		$784
	Total direct material cost		$18439
	Direct labor:
	110 DLHs*14 per DLH	$1540
	910 DLHs*21 per DLH	$19110
	Total direct Labor cost		$20650
	Fixed cost does not effect on special order
	Variable overhead (1020 DLH * 4.20)		$4284
	Total relevant cost for special order		$43373
2	Computation of selling price
	Direct material cost
	AG-5 : 9300 pounds *0.80 per pound	$7440
	Kl-2 : 7500 pounds *0.51 per pound	$3825
	CW-7 : 4200 pounds *1.56 per pound	$6552
	DF-6 : 9000 pounds *0.56 per pound	$5040
	Total Direct Material cost		$22857
	Direct Labor cost
	Regular time (1020 DLH * 60% *14)	$8568
	Overtime premium (1020 DLH * 40% *21)	$8568
	Total Direct labor cost		$17136
	Manufacturing overhead (1020 DLH *11.3)		$11526
	Total Manufacturing cost		$51519
	Markup (40%)		$20607.6
	Selling price		$72126.6