Question

Jenco, Inc., manufactures a combination fertilizer and weedkiller under the name Fertikil. This is the only product Jenco produces. Fertikil is sold nationwide through normal marketing channels to retail nurseries and garden stores. Taylor Nursery plans to sell a similar fertilizer and weedkiller compound through its regional nursery chain under its own private label. Taylor has asked Jenco to submit a bid for a 25,000-pound order of the private brand compound. Although the chemical composition of the Taylor compound differs from Fertikil, the manufacturing process is very similar. The Taylor compound will be produced in 1,000-pound lots. Each lot will require 60 direct labor hours and the following chemicals: Chemicals Quantity in Pounds CW-3 400 JX-6 300 MZ-8 200 BE-7 100 The first three chemicals (CW-3, JX-6, MZ-8) are all used in the production of Fertikil. BE-7 was used in a compound that Jenco has discontinued. This chemical was not sold or discarded because it does not deteriorate and storage facilities have been adequate. Jenco can sell BE-7 at the prevailing market price minus $.10 per pound selling and handling expenses. Jenco also has on hand a chemical called CN-5 that was manufactured for use in another product no longer produced. CN-5, which cannot be used in Fertikil, can be substituted for CW-3 on a one-for-one basis without affecting the quality of the Taylor compound. The quantity of CN-5 in inventory has a salvage value of $500.

Inventory and cost data for the chemicals that can be used to produce the Taylor compound are Raw Materials Pounds in Inventory Actual Price per Pound When Purchased Current Market Price per Pound CW-3 22,000 $ .80 $ .90 JX-6 5,000 .55 .60 MZ-8 8,000 1.40 1.60 BE-7 4,000 .60 .65 CN-5 5,500 .75 (salvage) The current direct labor rate is $7 per hour. The manufacturing overhead rate is established at the beginning of the year and is applied consistently throughout the year using direct labor hours (DLH) as the base. The predetermined overhead rate for the current year, based on a two-shift capacity of 400,000 total DLH with no overtime, is as follows: Variable manufacturing overhead $2.25 per DLH Fixed manufacturing overhead 3.75 per DLH Combined rate $6.00 per DLH Jenco’s production manager reports that the existing equipment and facilities are adequate to manufacture the Taylor compound. However, Jenco is within 800 hours of its two-shift capacity this month before it must schedule overtime. If need be, the Taylor compound can be produced on regular time by shifting a portion of Fertikil production to overtime. Jenco’s rate for overtime hours is one-and-one-half the regular pay rate, or $10.50 per hour. There is no allowance for any overtime premium in the manufacturing overhead rate. Jenco’s standard markup policy for new products is 25% of full manufacturing cost.

Question

What is the total direct labor cost for recurring 25-lot orders, assuming that 60% of each order can be completed during regular hours?

• A.$12,600

• B.$10,500

• C.$16,500

• D.$18,225

Answer 1

SOLUTION

Total direct labour cost recurring 25-lot orders,assuming that 60% of each order can be completed during regular hours.

Now,=60% of 25 lots

= 15 lots

So 15 lots order will complete in during regular hours

1 lot require 60 hours therefore 15 lot required 900 hours ( it is given that 60% of each order is completed during regular hours).

Remaining 10 lot require 600 hours ( 10*60).

This 10 lot order will be completed in over time.

Direct labour rate for regular hours = $7 per hour

(A) = 15 lot required 900 hours

So 900*$7 = $6300

( can be completed in daily labour hours)

(B) = 10 lot require 600 hours

So 600*$10.5 = $6300

( $10.5=over time labour hours)

Total direct labour = (A) + (B)

= $6300 + $6300

= $12600

Hence option (A) = $12600 IS CORRECT