Question

Wesco Incorporated's only product is a combination fertilizer/weedkiller called GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores

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 30,000-pound order of the private brand compound to Zwinger. While the chemical composition of the und 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 chemicals: Chemicals Quantity in Pounds AG-5 KL-2 380 CW-7 DE-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 $0.09 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 $570. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: Raw Material AG-5 Pounds in Inventory 24.000 5,600 7.900 6.000 5.600 Actual Price per Pound When Purchased $0.71 $0.51 $1.39 $0.52 $0.62 Current Market Price per Pound $ 0.81 $ 0.56 $ 1.59 $ 0.61 (Salvage) DE-6 BH-3

Answer 1

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Req 1
Salvage value of BH3	$               570
Cost of remaining AG5 used [(30 Lots*380 Pounds)-5,600 Pounds]*$0.81	$            4,698
KL 2: 240*30 Lots*$0.56	$            4,032
CW 7: 130*30 Lots*$1.59	$            6,201
DF-6: 250 Pound*30 lots=7,500 Pounds
(6,000 Inventory)*($0.61-$0.09 Handling charges)	$            3,120
Remaining 1,500 units*$0.61	$               915
Total direct materials cost	$         19,536
Direct Labor Hours 30 DLH*30 Lots=900 DLH
Normal Hours: 140, Hence Overtime 900-140=760
140 DLHs × $16.00 per DLH	$            2,240
760 DLHs × $24.00 per DLH	$         18,240
Total direct labor cost	$         20,480
Variable Overhead Cost:
900 DLHs × $5.40 per DLH	$            4,860
Total relevant cost of the special order=Minimum Price	$         44,876
Req 2
AG-5: 11,400 pounds × $0.81 per pound	$            9,234
KL-2: 7,200 pounds × $0.56 per pound	$            4,032
CW-7: 3,900 pounds × $1.59 per pound	$            6,201
DF-6: 7,500 pounds × $0.61 per pound	$            4,575
Total direct materials cost	$         24,042
60% is regual hours i.e. 900*60%=540 Regular and overtime is 900-540=360
540 DLHs × $16.00 per DLH	$            8,640
360 DLHs × $24.00 per DLH	$            8,640
Total direct labor cost	$         17,280
Overhead: The full manufacturing cost includes both fixed and variable manufacturing overhead.
Manufacturing overhead applied:
900 DLHs × $13.70 per DLH	$         12,330
Full manufacturing cost	$         53,652
Markup (40% × $53,652)	$         21,461
Selling price (full manufacturing cost plus markup)	$         75,113