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 32 direct labor-hours and the following chemicals: Chemicals AG-5 KL-2 CW-7 DF-6 Quantity in Pounds 340 230 120 310 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 $420. 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 23,000 4,100 7,300 7,690 5,400 Actual Price per Pound When Purchased $ 0.72 $ 0.41 $ 1.24 $ 0.44 $ 0.69 Current Market Price per Pound $ 0.82 $ 0.46 $ 1.44 $ 0.51 (Salvage)

Answer 1

1. The lowest price that Wesco can bid for the order while covering its incremental costs is the marginal cost of manufacturing the order. This is calculated below

Material cost

Sr. No.	Material	AG-5	KL-2	CW-7	DF-6	BH-3
A	Requirement (Pounds) per lot of 1,000	340	230	120	310
B	Total requirement (A*29)	9860	6670	3480	8990
C	Inventory	23000	4100	7300	7690	5400
D	Replacement material	BH-3
E	Net requirement after replacement (B adjusted for replacement)	4460	6670	3480	8990	5400
F	Usage from inventory (min of C and E)	4460	4100	3480	7690	5400
G	Fresh purchase (E - F)	0	2570	0	1300	0
H	Inventory cost per unit ($)	0.72	0.41	1.24	0.43*	0.08**
I	Fresh purchase cost per unit ($)	0.82	0.46	1.44	0.51
J	Total Material cost (F*H) +(G*I) ***	3211.2	2863.2	4315.2	3969.7	420
K	Total material cost (sum of all J)	11568.1

Notes:

* Since DF-6 is no longer in use, the appropriate cost to be considered is the opportunity cost for not selling it , which is 0.51 less 0.08 of selling cost or 0.43

** For BH-3, the salvage value is the opportunity cost

*** The material cost is calculated by applying current purchase cost to quantity available in stock and fesh purchase cost for additional quantity.

Labour cost

Sr. No.	Particulars
A	Direct labour hours reqd. per plot	32
B	Total hours reqd. (A*29)	928
C	Hours available in two-shift capacity	110
D	Overtime required (B-C)	818
E	Hourly rate for regular time	16
F	Hourly rate for Overtime	24
G	Total direct labour cost (C*E)+(D*F)	21392

Variable overheads

=Total hours * rate per hour

=928*4.70= 4361.6

Marginal cost = Material cost + Direct labour cost + variable overheads

= 11568.1+21392+4361.6

= 37321.7

The minimum price to quote for this order is $ 37321.7

2. For regular ordering, the price will be'calculated as below:

Material cost

Sr. No.	Material	AG-5	KL-2	CW-7	DF-6
A	Requirement (Pounds) per lot of 1,000	340	230	120	310
B	Total requirement (A*29)	9860	6670	3480	8990
C	Fresh purchase cost per unit ($)	0.82	0.46	1.44	0.51
D	Total Material cost (B*C)	8085.2	3068.2	5011.2	4584.9
E	Total material cost (sum of all D)	20749.5

Direct Labour cost

Sr. No.	Particulars
A	Direct labour hours reqd. per plot	32
B	Total hours reqd. (A*29)	928
C	Hours available in two-shift capacity (60% of B)	556.8
D	Overtime required (B-C)	371.2
E	Hourly rate for regular time	16
F	Hourly rate for Overtime	24
G	Total direct labour cost (C*E)+(D*F)	17817.6

Overheads

=Total direct labour hours * hourly rate (fixed + variable)

=928*13.10 = 12156.8

Total cost = Material cost +direct labour cost + overheads

=20749.5+17817.6+12156.8

=50723.9

Standard markup (40% of total cost) = 20289.56

Price to quote = cost +markup

=50723.9+20289.56

=$71013.46 per 29000 pounds