What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services? CASE 6-31 Integrative Case Relevant Costs Pricing L06-1. 06-4 Wesco Incorporuted's only product is a combination fertilizerwekiller called GowWeed. GrowNWeed is sold nationwide to retail murseries and garden stores, Zwinger Nursery plans to sell a similar fertilizerweedkiller compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facilities of its Differential Analysis: The key to Decision Making own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 20,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing pro- cesses are very similar. The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 25 direct labor-hours and the following chemicals: Chemicals AG-5 ... KL-2 CW-7 DF-6... Quantity in Pounds 300 200 150 175 The first three chemicals (AC-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less 50.10 per pound selling and han- dling expenses. Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced BH-3, which cannot be used in GrowNWeed, can be substi- tuted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $600. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: Actual Price per Pound When Purchased Pounds in Inventory Current Market Price per Pound $1.20 $1.05 $1.35 $0.70 (Salvage) Raw Material AG-5. KL-2 CW-7. DF-6... BH-3... $1.15 $1.10 $1.35 $0.80 $0.90 18.000 6.000 7.000 3.000 3,500 The current direct labor wage rate is $14 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two- shift capacity with no overtime, is as follows: $ 3.00 per DLH 10.50 per DLH $13.50 per DLH Variable manufacturing overhead .. Fixed manufacturing overhead........ Combined predetermined overhead rate....... Weed pro Wesco's production manager reports that the present equipment and facilities are adequate iner compound. Therefore, the order would have no effect on total fixed In is within 400 hours of its two shift capacity this Inne in overtime. If need be, the ance for any Uvere pie PicuLLU U TUUD 1 Required: 1. Wesco has decided to submit a bid for the 20.000 pound order of Zwinger's new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order and still exactly cover its incremental manufacturing costs. 2. Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 20.000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two- shift capacity. However, production could be scheduled so that 90% of each Zwinger order could be completed during regular hours. As another option, some Grown Weed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices. Wesco's standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 20,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. (CMA adanted) What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services? CASE 6-31 Integrative Case Relevant Costs Pricing L06-1. 06-4 Wesco Incorporuted's only product is a combination fertilizerwekiller called GowWeed. GrowNWeed is sold nationwide to retail murseries and garden stores, Zwinger Nursery plans to sell a similar fertilizerweedkiller compound through its regional nursery chain under its own private label. Zwinger does not have manufacturing facilities of its Differential Analysis: The key to Decision Making own, so it has asked Wesco (and several other companies) to submit a bid for manufacturing and delivering a 20,000-pound order of the private brand compound to Zwinger. While the chemical composition of the Zwinger compound differs from that of GrowNWeed, the manufacturing pro- cesses are very similar. The Zwinger compound would be produced in 1,000-pound lots. Each lot would require 25 direct labor-hours and the following chemicals: Chemicals AG-5 ... KL-2 CW-7 DF-6... Quantity in Pounds 300 200 150 175 The first three chemicals (AC-5, KL-2, and CW-7) are all used in the production of GrowNWeed. DF-6 was used in another compound that Wesco discontinued several months ago. The supply of DF-6 that Wesco had on hand when the other compound was discontinued was not discarded. Wesco could sell its supply of DF-6 at the prevailing market price less 50.10 per pound selling and han- dling expenses. Wesco also has on hand a chemical called BH-3, which was manufactured for use in another product that is no longer produced BH-3, which cannot be used in GrowNWeed, can be substi- tuted for AG-5 on a one-for-one basis without affecting the quality of the Zwinger compound. The BH-3 in inventory has a salvage value of $600. Inventory and cost data for the chemicals that can be used to produce the Zwinger compound are shown below: Actual Price per Pound When Purchased Pounds in Inventory Current Market Price per Pound $1.20 $1.05 $1.35 $0.70 (Salvage) Raw Material AG-5. KL-2 CW-7. DF-6... BH-3... $1.15 $1.10 $1.35 $0.80 $0.90 18.000 6.000 7.000 3.000 3,500 The current direct labor wage rate is $14 per hour. The predetermined overhead rate is based on direct labor-hours (DLH). The predetermined overhead rate for the current year, based on a two- shift capacity with no overtime, is as follows: $ 3.00 per DLH 10.50 per DLH $13.50 per DLH Variable manufacturing overhead .. Fixed manufacturing overhead........ Combined predetermined overhead rate....... Weed pro Wesco's production manager reports that the present equipment and facilities are adequate iner compound. Therefore, the order would have no effect on total fixed In is within 400 hours of its two shift capacity this Inne in overtime. If need be, the ance for any Uvere pie PicuLLU U TUUD 1 Required: 1. Wesco has decided to submit a bid for the 20.000 pound order of Zwinger's new compound. The order must be delivered by the end of the current month. Zwinger has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Wesco could bid for the order and still exactly cover its incremental manufacturing costs. 2. Refer to the original data. Assume that Zwinger Nursery plans to place regular orders for 20.000-pound lots of the new compound. Wesco expects the demand for GrowNWeed to remain strong. Therefore, the recurring orders from Zwinger would put Wesco over its two- shift capacity. However, production could be scheduled so that 90% of each Zwinger order could be completed during regular hours. As another option, some Grown Weed production could be shifted temporarily to overtime so that the Zwinger orders could be produced on regular time. Current market prices are the best available estimates of future market prices. Wesco's standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Wesco, Inc., would quote Zwinger Nursery for each 20,000 pound lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed. (CMA adanted)