| Jenco, Inc., manufactures a combination fertilizer and weedkiller under the name Fertikil. This is the only product Jenco produces. Fertikil is sold nationwide through normal marketing channels to retail nurseries and garden stores. | | Taylor Nursery plans to sell a similar fertilizer and weedkiller 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. Although the chemical composition of the Taylor compound differs from Fertikil, the manufacturing process is very similar. | | The Taylor compound will be produced in 1,000-pound lots. Each lot will require 60 direct labor hours and the following chemicals: | | Chemicals | Quantity in Pounds | | | | | CW-3 | 400 | | JX-6 | 300 | | MZ-8 | 200 | | BE-7 | 100 | | | 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 storage facilities have been adequate. Jenco can sell BE-7 at the prevailing market price minus $.10 per pound selling and handling expenses. | | Jenco also has on hand a chemical called CN-5 that was manufactured for use in another product 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 that can be used to produce the Taylor compound are | | Raw Materials | Pounds in Inventory | Actual Price per Pound When Purchased | Current Market Price per Pound | | | | | | | CW-3 | 22,000 | $ .80 | $ .90 | | JX-6 | 5,000 | .55 | .60 | | MZ-8 | 8,000 | 1.40 | 1.60 | | BE-7 | 4,000 | .60 | .65 | | CN-5 | 5,500 | .75 | (salvage) | | | 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 (DLH) as the base. 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 | $2.25 | per DLH | | Fixed manufacturing overhead | 3.75 | per DLH | | | | | | Combined rate | $6.00 | per DLH | | | | | | | Jencos production manager reports that the existing 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 can be produced on regular time by shifting a portion of Fertikil production to overtime. Jencos 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. | | Jencos standard markup policy for new products is 25% of full manufacturing cost. | |
