3. Please check and fill the box where answers needed thanks. Wesco Incorporated
ID: 2601784 • Letter: 3
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3. Please check and fill the box where answers needed thanks.
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 Quantity in Pounds 270 110 CW-7 DF-6 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 $450 Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below Actual Price per Pound When Current Market Price per Pound Pounds in Raw Material InventoryPurchased AG-5 KL-2 CW-7 DF-6 BH-3 27.000 4,000 7,900 6.240 4.600 $0.76 $0.36 $1.32 $1.52 $0.66 Salvage) 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:Explanation / Answer
1)
Direct Materials required to produce 29,000 pounds of Zwinger Compound
AG-5
10,440
KL-2
7,830
CW-7
3,190
DF-6
7,540
Since AG-5 can be replaced with BH-3 on one-for-one basis, 4,600 pounds of AG-5 will be replaced with BH-3 and the cost for this would be equal to the salvage value of BH-3.
Direct Materials required to produce 29,000 pounds of Zwinger Compound after inclusion of BH-3
AG-5
5,840
BH-3
4,600
KL-2
7,830
CW-7
3,190
DF-6
7,540
Direct Materials Cost
Chemical
Quantity
Cost per pound
Total Cost
AG-5
5,840
0.86
$5,022.40
BH-3
4,600
NA
$450.00
KL-2
7,830
0.41
$3,210.30
CW-7
3,190
1.52
$4,848.80
DF-6
6,240
0.35
$2,184.00
DF-6
1,300
0.46
$598.00
Total Cost of Direct Materials
$16,313.50
There would be two different costs for DF-6. One cost would be for the current inventory for DF-6 that Wesco holds. The cost for current inventory would be $0.35 ($0.46-$0.11) per pound. For remaining quantity, the cost would be $0.46 per pound as per the market price.
Total Direct labor required to produce 29,000 pounds = 32 x 29 = 928 hours
Since only 340 hours are available, rest of hours would be overtime, which is 928 – 340 = 588 hours
Total direct labor cost = (340 x $16) + (588 x $24) = $19,552
Total Overhead cost = 928 DLH x $3.70 = 3,434
Since the production of new component can be done with currently available machinery/resources, there won’t be any increase in fixed cost overheads.
Total cost of production of 29,000 pounds of compound = $16,313.50 + $19,552 + $3,433.60 = $39,299.10
Hence, your answer is correct for Part-1.
2) Herein, we need to calculate the price for recurring orders of 29,000 pounds.
Direct materials: The cost of direct materials needs to be calculated on the basis of market price as the existing inventory will get exhausted in first month only.
Direct Materials cost at market price
Chemical
Quantity
Cost per pound
Total Cost
AG-5
10,440
0.86
$8,978.40
KL-2
7,830
0.41
$3,210.30
CW-7
3,190
1.52
$4,848.80
DF-6
7,540
0.46
$3,468.40
Total Cost of Direct Materials
$20,505.90
Direct labor: As given, 60% of the production would be done during regular shifts and remaining production would be done using “Overtime”.
Direct labor costs for Regular shifts = (928 hours x 60%) x $16 = $8,908.8
Direct labor costs for Overtime = (928 hours x 40%) x $24 = $8,908.8
Total Direct labor cost = $8.908.80 + $8,908.80 = $17,817.60
Overhead Costs: In this scenario, both: variable overhead costs and fixed overhead will be considered.
Total Overhead Costs = $10.60 x 928 = $9,836.80
Total Manufacturing Cost = $20,505.90 + $17,817.60 + $9,836.80 = $48,160.30
Target Mark-up = $48,160.30 x 40% = $19,264.12
Price to be quoted for 29,000 pounds of Zwinger = $48,160.30 + $19,264.12 = $67,424.42
Hence, your answer to second part seems to be incorrect. Please run a check on your steps.
Direct Materials required to produce 29,000 pounds of Zwinger Compound
AG-5
10,440
KL-2
7,830
CW-7
3,190
DF-6
7,540
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