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Quantity in Pounds
300
200
150
175
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 $0.10 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 $600.
Inventory and cost data for the chemicals that can be used to produce the
Zwinger compound are shown below:
Actual
Price
Current
per Pound
Market
Raw
Pounds in
When
Price
Material
Inventory
Purchased per Pound
AG-5
KL-2
CW-7
DF-6
BH-3
18,000
$1.15
$1.20
6,000
$1.10
$1.05
7,000
$1.35
$1.35
3,000
$0.80
$0.70
3,500
$0.90
(Salvage)
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:
Variable manufacturing
overhead
Fixed manufacturing overhead
Combined predetermined
overhead rate
3.00
10.5
0
13.5
0
per
DLH
per
DLH
per
DLH
$ 600
3,000
4,200
4,050
2,150
14,000
Direct labor: 25 DLHs per lot 20 lots = 500 DLHs. Because only 400 hours
can be scheduled during regular time this month, overtime would have to
be used for the remaining 100 hours.
400 DLHs $14.00 per DLH
100 DLHs $21.00 per DLH
Total direct labor cost
5,600
2,100
7,700
Overhead: This special order will not increase fixed overhead costs. Therefore,
only the variable overhead is relevant.
500 DLHs $3.00 per DLH
1,500
Total relevant cost of the special order
$23,200
2. Refer to the original data. Assume that Zwinger Nursery plans to place regular
orders for 20,000-pound lots of the new compound. Wesco expects the
demand for GrowNWeed to remain strong. Therefore, the recurring orders
from Zwinger would put Wesco over its two-shift capacity. However,
production could be scheduled so that 90% of each Zwinger order could be
completed during regular hours. As another option, some GrowNWeed
production could be shifted temporarily to overtime so that the Zwinger
orders could be produced on regular time. Current market prices are the best
available estimates of future market prices.
Wescos standard mark-up policy for new products is 40% of the full
manufacturing cost, including fixed manufacturing overhead. Calculate the
price that Wesco, Inc., would quote Zwinger Nursery for each 20,000 pound
lot of the new compound, assuming that it is to be treated as a new product
and this pricing policy followed.
ANSWER:
In this part, we calculate the price for recurring orders of 20,000 pounds (20
lots) using the companys 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 (6,000 pounds $1.20 per pound)
KL-2 (4,000 pounds $1.05 per pound)
CW-7 (3,000 pounds $1.35 per pound)
DF-6 (3,500 pounds $0.70 per pound)
Total direct materials cost
$7,200
4,200
4,050
2,450
17,900
Direct labor: 90% of the production of a batch can be done on regular time;
but the remaining production must be done on overtime.
Regular time (450 DLHs $14.00 per DLH)
Overtime premium (50 DLHs $21.00 per DLH)
Total direct labor cost
6,300
1,050
7,350
Overhead: The full manufacturing cost includes both fixed and variable
manufacturing overhead.
Manufacturing overhead applied:
(500 DLHs $13.50 per DLH)
Full manufacturing cost
Markup (40% $32,000)
Selling price
6,750
32,000
12,800
$44,800