Wesco Incorporateds only product is a combination fertilizer

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 34,000-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 30 direct labor-hours and the following Quantity in Chemicals AG-5 KL-2 Pounds 300 250 110 340 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 $o.09 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 $510 Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below

Solution

Computation of Lowest Price for Bid Cost of AG-5 AG-5: 300 pounds per lot × 34 lots 10200 Pound Substitute BH-3 on a one-for-one basis to its total of 4600 pounds. If BH-3 is not used in this order, it will be salvaged for $510. Therefore, the relevant cost $510.00 The remaining 5600 pounds would be AG-5 at a cost of ( 5600 X $0.89) $4,984.00 $5,494.00 KL-2: (250 pounds per lot × 34lots X $0.47) $3,995.00 CW-7: (110 pounds per lot × 34lots X$1.44) $5,385.60 Cost of DF-6 DF-6: 340 pounds per lot × 34 lots = 11560 pounds. Use 4600 pounds in inventory at $0.43 per pound ($0.52market price – $0.09 handling charge) ( $1978 + (6960*$0.52)) $5,597.20 Total Direct Material Cost $20,471.80 Direct labor: 490 DLHs × $18.00 per DLH $8,820.00 530 DLHs × $27.00 per DLH $14,310.00 Total direct labor cost $23,130.00 special order will not increase fixed overhead costs. variable overhead is relevant. (1020 DLHX $4.20) $4,284.00 Total relevant cost of the special order $47,885.80 2. Computaation of Selling Price Direct Material Cost AG-5: 10200 pounds × $0.89 per pound ............................ $9,078.00 KL-2: 8500 pounds × $0.47 per pound $3,995.00 CW-7: 3740 pounds × $1.44per pound $5,385.60 DF-6: 11560pounds × $0.52 per pound $6,011.20 Total direct materials cost $24,469.80 Direct Labour Cost Regular time ( 1020 DLH X 60%X $12) $7,344.00 Overtime premium ( 1020X40%X$27) $11,016.00 Total direct labor cost ....................................................... $18,360.00 Manufacturing overhead applied (1020 DLH X $11.40) $11,628.00 Total Manufacturing Cost $54,457.80 Markup @40% $21,783.12 Selling price (full manufacturing cost plus markup) $76,240.92