Chemco Inc. manufactures a combination fertilizer/weed-killer under the name Fertikil. It is the only product produced by Chemco at the present time. Fertikil is sold nationwide, through normal marketing channels, to retail nurseries and garden stores.
National Nursery Company plans to sell a similar fertilizer/weed-killer compound through its regional nursery chain under its own private label. National Nursery has asked Chemco to submit a bid for a 25,000-pound order of the private-brand compound. The chemical composition of the National Nursery compound differs from Fertikil, but the manufacturing process is similar.
The National Nursery compound would be produced in 1,000-pound lots. Each lot would require 60 direct labor hours and the following chemicals:
Chemical Quantity (in pounds)
CW-3 ................................... 400
JX-6 ..................................... 300
MZ-8 .................................... 200
BE-7 ..................................... 100
The first three chemicals (CW-3, JX-6, and MZ-8) are all used in the production of Fertikil. BE-7 was used in a compound that Chemco has discontinued. This chemical was not sold or discarded because it does not deteriorate, and there have been adequate storage facilities. Chemco can sell BE-7 at the prevailing market price less 10 cents per pound for selling and handling expenses.
Chemco also has on hand a chemical called CN-5, which was manufactured for use in another product that is no longer produced. CN-5, which cannot be used in Fertikil, can be substituted for CW-3 on a one-for-one basis without affecting the quality of the National Nursery compound. The quantity of CN-5 in inventory has a salvage value of $500.
Inventory and cost data for the chemicals that can be used to produce the National Nursery compound are as follows:

The current direct labor rate is $7 per hour. The factory overhead rate is established at the beginning of the year and is applied consistently throughout the year, using direct labor hours (DLH) as the base. The predetermined overhead rate for the current year, based on a two-shift capacity of 400,000 totals DLH with no overtime, is as follows:
Variable factory overhead ............................................ $2.25 per DLH
Fixed factory overhead ............................................... 3.75 per DLH
Combined factory overhead rate .................................... $6.00 per DLH
Chemco's production manager reports that the present equipment and facilities are adequate to manufacture the National Nursery compound. However, Chemco is within 800 hours of its two-shift capacity this month before it must schedule overtime. If need be, the National Nursery compound can be produced on regular time by shifting a portion of Fertikil production to overtime. Chemco's rate for overtime is one and one-half times the regular pay rate, or $10.50 per hour. There is no allowance for any overtime premium in the factory overhead rate. Chemco's standard markup policy for new products is 25% of the full manufacturing cost.
Required:
(1) Calculate the lowest price Chemco can bid for the order and not reduce its net income. Assume that Chemco has decided to submit a bid for a 25,000-pound order of National Nursery compound. The order must be delivered by the end of the current month. It is presumed to be a one-time order (that is, it will probably not be repeated).
(2) Disregard your answer to requirement 1, and calculate the price Chemco should quote National Nursery for each 25,000-pound lot of the compound, assuming that National Nursery plans to place regular orders for 25,000-pound lots of the new compound during the coming year. Chemco expects the demand for Fertikil to remain strong again in the coming year. Therefore, the recurring orders from National Nursery will put Chemco over its two-shift capacity. However, production can be scheduled so that 60% of each National Nursery order can be completed during regular hours, or Fertikil production could be shifted temporarily to overtime, so that the National Nursery orders could be produced on regular time. Chemco's production manager has estimated that the prices of all chemicals will stabilize at the current market rates for the coming year, and that all other manufacturing costs are expected to be maintained at the same rates or amounts.

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Inventory Market Price per Pound Chemical CW-3 JX-6 MZ-8 Pounds in Inventory 22,000 5,000 8,000 4,000 5,500 Pound $.80 $.90 1.40 1.60 BE-7 CN-5