Wesco Incorporated\'s only product is a combination fertiizer weedkiler caled Gr
ID: 2602470 • Letter: W
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Wesco Incorporated's only product is a combination fertiizer weedkiler caled GroWNWeed GrowkWeed is old natiowdde to retai narseries and gaæden stores Zwinger Nursery plans to sel a simar ferice /weedkler compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facities of is own, so it has asked Wesco (and several other companies) to submt a bid for manufacturing and dehering a 26,000-pound arder of the private brand compound to Zwinger Whle the dhemical compositon of the Zwinger compound iflers trom hat of GroNWeed the manufacturing processes are very smia The Zwinger compound woukd be produced in 1,000-pound lots Each lot would requre 36 airect labor hours and the folowing chemicals KL-2 OF-6 250 The frst three chemicals (AG-5, KL-2, and CW-7) are all used in the prodaction of GrowWeed DF-6 was used r·ar ther compound that wescodscontrued several months ago The supply of DF 6 fat Wesco had on hand when the other compound was dincontinued was not discarded Wesco couled selts supply of DF-6 at the prevaling market price less 50 11 per pound seling and handing expenses Wesco also has on hand a chemical caled t-3 whch was manufactured tw use r, another product that no longer produced BH-3 whid, carrot be used n Godweed can be strsthled r AG 5 a one- for-one basis without effecting the quaity of the Zwieger compound. The BH-3 in inventory has a savage value of $510 matsthat can be used to produce the Zwner compound "hown Inventory and cost datafor te below Actual Price Curnent Price per 50 87 50.49 $0 54 069 (Savage Pounds ir 24,000 $ 800 8800 50 77 $0.44 KI-2 DF-6 so 54 5,600 The current direa ut or wage iates S16 per hou The predetermined overhead atebased on area ubos-hours (DLH). The predeternined overhead rate for the ourrent year based on a twe-shit capachy with overhead 5 360 per DL Fbed manufacturing overhead 660 per DUH Combined predetermined overhead rate $ 10 40 per DLH Wesco's production manager reports that the present equipnent and facities are adequate to manufacture the Zwinger compound. Therefore, the oder wouis have no enect on toral fsed manufacuring ad coats However Wesco is within 420 hours of its tvo-thit capacity this month Ary addticeal hours beyond the 420 hours mast be done in overtme. If need be. the Zsinger compound could be produced on reguiar tame by overtime is 524 per hour There is no allouance for any oversime premium in the predeterms shifing a direct labor wa Required: 1. Wesoo has decided to sutmt a bid for the 26 000 pound order of Zoingers new compound The order idated the "l·aseine order must be demered by the end of hearrem month. Zwnger has hat wid not be repeated Calbulale the loweat price that Vlesco couid bis for the ceder whout reduong ts net operating inome (Round intermediate calcalations and fial answer to 2 decimal places. for 28.000-pound GroniVleed to remais sticeng Therefore te 2 Refer to the orgnai data Assume that Zinger Nursery plaes to place regiar orders ots of the ne compoune Wesco expects the demand aroite cold be oorpleted durmpiegiar hours scheduled so that 60% of eoch Zninger order opton, some aleed produtson cosid be be produced os regular time Currest markee prices are the best ualcle estmates of fhure esoo s standard mkup polcy tor ne produts is40% of the S that,t itto be treated as a ne·produt3 are tis prong siderng the possblty of the ordet teing regir (Roun pocy s fokoed Hrt Calculate the price con inteemediate calolaticns and fimat anwt Seting price 26 000 oundExplanation / Answer
1. The lowest price Wesco could bid for the one-time special order of 26,000 pounds (26 lots) without losing money would be $36,902.40, as shown below:
Direct materials:
AG-5: 360 pounds per lot × 26 lots = 9,360 pounds.
Substitute BH-3 on a one-for-one basis to its total of 5,600 pounds. If BH-3 is not used in this order, it will be salvaged
for $510. Therefore, the relevant cost is............................ $ 510
The remaining 3,760 pounds would be AG-5 at a cost of
$0.87 per pound.............................................................. 3,271.20
KL-2: 290 pounds per lot × 26 lots = 7,540 pounds at $0.49
per pound ....................................................................... 3,694.60
CW-7: 100 pounds per lot × 26 lots = 2,600 pounds at
$1.54 per pound.............................................................. 4,004
DF-6: 250 pounds per lot × 26 lots = 6,500 pounds. Use 5,100 pounds in inventory at $0.43 per pound ($0.54 market price – $0.11 handling charge), and purchase the
remaining 1400 pounds at $0.54 per pound ........................ 2,949
Total direct materials cost ................................................... 14,428.80
Direct labor: 36 DLHs per lot × 26 lots = 936 DLHs. Because only 420 hours can be scheduled during regular time this month, overtime would have to be used for the remaining 516 hours.
420 DLHs × $16.00 per DLH ...............................................
6,720
516 DLHs × $24.00 per DLH ...............................................
12,384
Total direct labor cost .........................................................
19,104
Overhead: This special order will not increase fixed overhead costs.
Therefore, only the variable overhead is relevant.
936 DLHs × $3.60 per DLH.................................................3,369.6
Total relevant cost of the special order................................... $36,902.40
2. In this part, we calculate the price for recurring orders of 26,000 pounds (26 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: 9,360 pounds × $0.87 per pound ............................
$8,143.20
KL-2: 7,540 pounds × $0.49 per pound .............................
3,694.60
CW-7: 2,600 pounds × $1.54 per pound............................
4,004
DF-6: 6,500 pounds × $0.54 per pound.............................
3,510
Total direct materials cost ................................................
19,351.80
Direct labor: 60% (i.e., 562 DLHs) of the production of a batch can be done on regular time; but the remaining production (i.e., 374 DLHs) must be done on overtime.
Regular time 562 DLHs × $16.00 per DLH .........................
8,992
Overtime premium 374 DLHs × $24.00 per DLH ..................
8,976
Total direct labor cost .......................................................
17,968
Overhead: The full manufacturing cost includes both fixed and variable manufacturing overhead.
Manufacturing overhead applied:
936 DLHs × $10.40 per DLH ..........................................
9,734.40
Full manufacturing cost ......................................................
47,054.20
Markup (40% × $47,054.2) ...................................................
18,821.68
Selling price (full manufacturing cost plus markup)...............
$65,875.88
420 DLHs × $16.00 per DLH ...............................................
6,720
516 DLHs × $24.00 per DLH ...............................................
12,384
Total direct labor cost .........................................................
19,104
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