Wesco Incorporated’s only product is a combination fertilizer/weedkiller called
ID: 2601834 • Letter: W
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 28,000-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 37 direct labor-hours and the following chemicals:
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 $0.11 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 $590.
Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below:
The current direct labor wage rate is $16 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two-shift capacity with no overtime, is as follows:
Wesco’s production manager reports that the present equipment and facilities are adequate to manufacture the Zwinger compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs. However, Wesco is within 490 hours of its two-shift capacity this month. Any additional hours beyond the 490 hours must be done in overtime. If need be, the Zwinger compound could be produced on regular time by shifting a portion of GrowNWeed production to overtime. Wesco’s direct labor wage rate for overtime is $24 per hour. There is no allowance for any overtime premium in the predetermined overhead rate.
1. Wesco has decided to submit a bid for the 28,000 pound order of Zwinger’s new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order without reducing its net operating income. (Round intermediate calculations and final answer to 2 decimal places.)
Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 28,000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two-shift capacity. However, production could be scheduled so that 60% of each Zwinger order could be completed during regular hours. As another option, some GrowNWeed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices.
Wesco’s standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 28,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. Hint: Calculate the price considering the possibility of this order being regular. (Round intermediate calculations and final answer to 2 decimal places.)
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 28,000-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 37 direct labor-hours and the following chemicals:
Explanation / Answer
1. The lowest price Wesco could bid for the one-time special order of 28,000 pounds (28x lots) without losing money would be $42,109.40, as shown below:
Direct materials:
AG-5: 320 pounds per lot × 28 lots = 8,960 pounds.
Substitute BH-3 on a one-for-one basis to its total of 5,300 pounds. If BH-3 is not used in this order, it will be salvaged
for $590. Therefore, the relevant cost is............................ $ 590
The remaining 3,660 pounds would be AG-5 at a cost of
$0.89 per pound.............................................................. 3,257.40
KL-2: 270 pounds per lot × 28 lots = 7,560 pounds at $0.41
per pound ....................................................................... 3,099.60
CW-7: 190 pounds per lot × 28 lots = 5,320 pounds at
$1.44 per pound.............................................................. 7,660.80
DF-6: 220 pounds per lot × 28 lots = 6,160 pounds. Use 4,760 pounds in inventory at $0.35 per pound ($0.46 market price – $0.11 handling charge), and purchase the
remaining 1400 pounds at $0.46 per pound ........................ 2,310
Total direct materials cost ................................................... 16,917.80
Direct labor: 37 DLHs per lot × 28 lots = 1036 DLHs. Because only 490 hours can be scheduled during regular time this month, overtime would have to be used for the remaining 546 hours.
490 DLHs × $16.00 per DLH ...............................................
7,840
546 DLHs × $24.00 per DLH ...............................................
13,104
Total direct labor cost .........................................................
20,944
Overhead: This special order will not increase fixed overhead costs.
Therefore, only the variable overhead is relevant.
1036 DLHs × $4.10 per DLH................................................. 4,247.6
Total relevant cost of the special order................................... $42,109.40
2. In this part, we calculate the price for recurring orders of 28,000 pounds (28 lots) using the company’s rule of marking up its full manufacturing cost. This is not the best pricing policy to follow, but is a common practice in business.
Direct materials: Because the initial order will exhaust existing inventories of BH-3 and DF-6 and new supplies would have to be purchased, all raw materials should be charged at their expected future cost, which is the current market price.
AG-5: 8,960 pounds × $0.89 per pound ............................
$7,974.40
KL-2: 7,560 pounds × $0.41 per pound .............................
3,099.60
CW-7: 5,320 pounds × $1.44 per pound............................
7,660.80
DF-6: 6,160 pounds × $0.46 per pound.............................
2,833.60
Total direct materials cost ................................................
21,568.40
Direct labor: 60% (i.e., 622 DLHs) of the production of a batch can be done on regular time; but the remaining production (i.e., 414 DLHs) must be done on overtime.
Regular time 622 DLHs × $16.00 per DLH .........................
9,952
Overtime premium 414 DLHs × $24.00 per DLH ..................
9,936
Total direct labor cost .......................................................
19,888
Overhead: The full manufacturing cost includes both fixed and variable manufacturing overhead.
Manufacturing overhead applied:
1036 DLHs × $11.30 per DLH ..........................................
11,706.80
Full manufacturing cost ......................................................
53,163.20
Markup (40% × $53,163.2) ...................................................
21,265.28
Selling price (full manufacturing cost plus markup)...............
$74,428.48
490 DLHs × $16.00 per DLH ...............................................
7,840
546 DLHs × $24.00 per DLH ...............................................
13,104
Total direct labor cost .........................................................
20,944
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