Zylar Industries is a manufacturer of standard and custom-designed bottling equi

Question

Zylar Industries is a manufacturer of standard and custom-designed bottling equipment. Early in December 20x0, Lyan Company asked Zylar to quote a price for a custom-designed bottling machine to be delivered in April. Lyan intends to make a decision on the purchase of such a machine by January 1, so Zylar would have the entire first quarter of 20x1 to build the equipment. Zylar's pricing policy for custom-designed equipment is 40 percent markup on absorption manufacturing cost. Lyan's specifications for the equipment have been reviewed by Zylar's Engineering and Cost Management departments, which made the following estimates for direct material and direct labor. Direct material Direct labor (12,450 hours at $18) $264,000 224,100 Manufacturing overhead is applied on the basis of direct-labor hours. Zylar normally plans to run its plant at a level of 15,800 direct- labor hours per month and assigns overhead on the basis of 189,600 direct-labor hours per year. The overhead application rate for 20x1 of $11.00 per hour is based on the following budgeted manufacturing overhead costs for 20x1. Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead $1,251, 360 834,240 $2,085,600 Zylar's production schedule calls for 12,400 direct-labor hours per month during the first quarter. If Zylar is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increased to 15,800 direct-labor hours each month on short notice. Furthermore, Zylar's employees are unwilling to work overtime. Sales of the standard product equal to the reduced production would be lost, but there would be no permanent loss of future sales or customers. The standard product for which the production schedule would be reduced has a unit sales price of $12,400 and the following cost structure.

Explanation / Answer

Calculate the bid Zylar would submit if it follows its standard pricing policy for special-purpose equipment.

Answer :

Direct material

$ 264,000

Direct Labour ( 12,450 hrs at $18 )

$ 224,100

Manufacturing overhead ( 12,450 hrs at $ 11)

$ 136,950

Total Manufacturing Costs

$ 625,050

Pricing Policy, Mark-up( 40% of full cost )

$ 250,020

Standard pricing policy

$ 875,070

Calculate the minimum bid Zylar would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1.

Answer:

Direct Material

$ 264,000

Direct labour ( 12,450 hrs at $18 )

$ 224,100

Variable Manufacturing overhead ( 12,450 hrs at $ 5.8 )

$ 72210

Opportunity lost of sales

$ 35100

Minimum Bid

$ 595,410

Notes: -    Opportunity lost of sales

Selling price per unit of standard product

$ 12,400

Variable cost per unit

Direct material - 2550

Direct labour      -   4500

Variable overheads -   1450       ( 250*5.8)

$ 8,500

Contribution margin per unit

$ 3,900

Standard product requirements-      32700 ( 12400*3)

Special order requirement       -         12450

Total hours required     -                 49,650 ( 32700+12450)               

Plant capacity per quarter -         47,400 ( 15,800*3)

Shortage in hours –                     2250 ( 49650 – 47400)

Lost unit sales -                                  9    ( 2250/ 250)

Lost Contribution                           3900*9

$ 35100

  

Direct material

$ 264,000

Direct Labour ( 12,450 hrs at $18 )

$ 224,100

Manufacturing overhead ( 12,450 hrs at $ 11)

$ 136,950

Total Manufacturing Costs

$ 625,050

Pricing Policy, Mark-up( 40% of full cost )

$ 250,020

Standard pricing policy

$ 875,070

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