Wesco Incorporated\'s only product is a combination fertilizer/weedkiller called
ID: 2602495 • 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 36 direct labor-hours and the following chemicals: oF-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 $0.08 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 $580. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: per Pound Market Price per $0.40 1.24 0.57 $0.45 1.44 s0.5o 300 The current direct labor wage rate is $14 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: 5.20 per DL 70 per DL Combined predetermined overhead rale $11.90 per DUHExplanation / Answer
1. The lowest price Wesco could bid for the one-time special order of 28,000 pounds (28 lots) without losing money would be $37,960.00, as shown below:
Direct materials:
AG-5: 390 pounds per lot × 28 lots = 10,920 pounds.
Substitute BH-3 on a one-for-one basis to its total of 6,300 pounds. If BH-3 is not used in this order, it will be salvaged
for $580. Therefore, the relevant cost is............................ $ 580
The remaining 4,620 pounds would be AG-5 at a cost of
$0.76 per pound.............................................................. 3,511.20
KL-2: 300 pounds per lot × 28 lots = 8,400 pounds at $0.45
per pound ....................................................................... 3,780.00
CW-7: 110 pounds per lot × 28 lots = 3,080 pounds at
$1.44 per pound.............................................................. 4,435.20
DF-6: 200 pounds per lot × 28 lots = 5,600 pounds. Use 4,200 pounds in inventory at $0.42 per pound ($0.50 market price – $0.08 handling charge), and purchase the
remaining 1400 pounds at $0.50 per pound ........................ 2,464
Total direct materials cost ................................................... 14,770.40
Direct labor: 36 DLHs per lot × 28 lots = 1008 DLHs. Because only 460 hours can be scheduled during regular time this month, overtime would have to be used for the remaining 548 hours.
460 DLHs × $14.00 per DLH ...............................................
6,440
548 DLHs × $21.00 per DLH ...............................................
11,508
Total direct labor cost .........................................................
17,948
Overhead: This special order will not increase fixed overhead costs.
Therefore, only the variable overhead is relevant.
1008 DLHs × $5.20 per DLH.................................................5,241.6
Total relevant cost of the special order................................... $37,960.00
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: 10,920 pounds × $0.76 per pound ............................
$8,299.20
KL-2: 8,400 pounds × $0.45 per pound .............................
3,780.00
CW-7: 3,080 pounds × $1.44 per pound............................
4,435.20
DF-6: 5,600 pounds × $0.50 per pound.............................
2,800.00
Total direct materials cost ................................................
19,314.40
Direct labor: 60% (i.e., 605 DLHs) of the production of a batch can be done on regular time; but the remaining production (i.e., 403 DLHs) must be done on overtime.
Regular time 605 DLHs × $14.00 per DLH .........................
8,470
Overtime premium 403 DLHs × $21.00 per DLH ..................
8,463
Total direct labor cost .......................................................
16,933
Overhead: The full manufacturing cost includes both fixed and variable manufacturing overhead.
Manufacturing overhead applied:
1008 DLHs × $11.90 per DLH ..........................................
11,995.20
Full manufacturing cost ......................................................
48,242.60
Markup (40% × $48,242.6) ...................................................
19,297.04
Selling price (full manufacturing cost plus markup)...............
$67,539.64
460 DLHs × $14.00 per DLH ...............................................
6,440
548 DLHs × $21.00 per DLH ...............................................
11,508
Total direct labor cost .........................................................
17,948
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