Assume that your management consulting team has been engaged to advise the management of the organization/individual in each of the following cases.

Integrative Case: Relevant Costs; Pricing

Double Duty, a combination fertilizer-weed killer, is Alanco's only product. It is sold nationwide

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 does not have manufacturing facilities of its own, so it

has asked Alanco (and several other companies) to submit a bid for manufacturing and delivering

a 25,000-kilogram order of the private-brand compound to Taylor. While the chemical

composition of the Taylor compound differs from that of Double Duty, the manufacturing

processes are very similar.

The Taylor compound would be produced in 1,000-kilogram lots. Each lot would require 30 direct

labour-hours and the following chemicals:

Chemical	Quantity in Kilogram
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 Double Duty.

BE-7 was used in another compound that Alanco discontinued several months ago. The supply

of BE-7 that Alanco had on hand when the other compound was discontinued was not

discarded. Alanco could sell its supply of BE-7 at the prevailing market price less $0.10 per

kilogram selling and handling expenses.

Alanco 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 Double Duty, can be

substituted for CW-3 on a one-to-one basis without affecting the quality of the Taylor compound.

The CN-5 in inventory has a salvage value of $500.

Inventory and cost data for the chemicals that can be used to produce the Taylor compound are

as shown below:

Raw Material	Kilograms In Inventory	Actual price per Kilogram When Purchased	Current Market price Per Kilogram
CW-3	22000	0.80	0.90
JX-6	5000	0.55	0.60
MZ-8	8000	1.40	1.60
BE-7	4000	0.60	0.65
CN-5	5500	0.75	Salvage

The current direct labor rate is $14 per hour. The predetermined overhead rate is based on

direct labour-hours (DLH). The predetermined overhead rate for the current year, based on a

two-shift capacity of 400,000 total DLH with no overtime, is as follows:

Variable manufacturing Over head	4.50 per DLH
Fixed Manufacturing Overhead	7.50 Per DLH
Combined Rate	12.00 per DLH

Alanco's production manager reports that the current equipment and facilities are adequate to

manufacture the Taylor compound. Therefore, the order would have no effect on total fixed

manufacturing overhead costs. However, Alanco is within 400 hours of its two-shift capacity this

month. Any additional hours beyond 400 hours must be done in overtime. If need be, the Taylor

compound could be produced on regular time by shifting a portion of Double Duty production to

overtime. Alanco's rate for overtime hours is 1 times the regular pay rate, or $21 per hour.

There is no allowance for any overtime premium in the predetermined overhead rate.

Required:

Preparing/Submission of a Bid Your report must consider all of the following issues

- Relevant costs

- Short-term Decision-making: Special Order/Opportunity Cost

- Qualitative versus quantitative issues: "Branding" and,Loyalty to existing customers

- Cost in product pricing/Pricing Policy

- Capacity/Capacity Utilization

- New market opportunities

- Organizational reporting and responsibility

- Presentation and use of language