Product Choices, Differential Costs of Inputs, Overhead Applications: Jenco, Inc., manufactures a combination fertilizer/weed-killer under the name
Question:
Product Choices, Differential Costs of Inputs, Overhead Applications: Jenco, Inc., manufactures a combination fertilizer/weed-killer under the name Fer- tikil. This is the only product Jenco produces at the present time. Fertikil is sold through normal marketing channels to retail nurseries and garden stores. Taylor Nursery plans to sell a similar fertilizer/weed-killer compound through its regional nursery chain under its own private label. Taylor has asked Jenco to submit a bid for a 25,000-pound order of the private brand compound. While the chemical composition of the Taylor compound differs from Fertikil, the manufacturing process is very similar. The Taylor compound would be produced in 1,000-pound lots. Each lot would require 60 direct labor-hours and the following chemicals.
The first three chemicals (CW-3, JX-6. MZ-8) are all used in the production of Fertikil. BE-7 was used in a compound that Jenco has discontinued. This chemical was not sold or discarded because it does not deteriorate and there have been adequate storage facilities. Jenco could sell BE-7 at the prevailing market price less $.10 per pound selling/handling expenses.
Jenco 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 Taylor compound. The quantity of CN-5 in inventory has a salvage value of $500.
Inventory and cost data for the chemicals are as follows:
The current direct labor rate is $7 per hour. The manufacturing overhead rate is established at the beginning of the year and is applied consistently throughout the year using direct labor-hours as the base. The predetermined overhead rate for the current year, based on a two-shift capacity of 400,000 total direct labor-hours (DLH) with no overtime, is as follows:
Jenco's production manager reports that the present equipment and facilities are adequate to manufacture the Taylor compound. However, Jenco is within 800 hours of its two-shift capacity this month before it must schedule overtime. If need be, the Taylor compound could be produced on regular time by shifting a portion of Fertikil production to overtime. Jenco's rate for overtime hours is one and one half the regular pay rate. or $10.50 per hour. There is no allowance for any overtime premium in the manufacturing overhead rate.
Jenco's standard markup policy for new products is 25 percent of full manufacturing cost.
Required:
a. Assume Jenco, Inc., has decided to submit a bid for a 25,000-pound order of Taylor's new compound. The order must be delivered by the end of the current month. Taylor has indicated that this is a one-time order that will not be repeated. Calculate the lowest price Jenco should bid for the order and not reduce its operating profit.
b. Without prejudice to your answer to requirement (a), assume that Taylor Nur- sery plans to place regular orders for 25,000-pound lots of the new compound during the coming year. Jenco expects the demand for Fertikil to remain strong again in the coming year. Therefore, the recurring orders from Taylor will put Jenco over its two-shift capacity. However, production can be scheduled so that 60 percent of each Taylor order can be completed during regular hours, or Fertikil production could be shifted temporarily to overtime so that the Taylor orders could be produced on regular time. Jenco'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.
Calculate the price Jenco, Inc., should quote Taylor Nursery for each 25,000- pound lot of the new compound, assuming that there will be recurring orders during the coming year.
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