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 Kilograms CW-3. JX-6. M2-8 ........ BE-7. 400 300 200 100 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 CM-3 Ix-6 ME-8. BE-7 CN-5. Kilograms in Inventory 22.000 5,000 8,000 4,000 5,500 Actual Price per Kilogram When Purchased $080 0.55 140 0.60 075 Current Market Price per Kilogram $090 060 160 0.65 (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 overhead. Fixed manufacturing overhead. Combined rate.......... $ 450 per DLH 150 per DLH $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. Questions 1.Relevant costs 2.Short-term Decision-making: Special Order/Opportunity Cost 3.Qualitative versus quantitative issues: "Branding" and, Loyalty to existing customers 4.Cost in product pricing/Pricing Policy 5.Capacity/Capacity Utilization