Jenco Incorporated's only product is a combination fertilizer-weed killer called Fertikil. Fertikil 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 Jenco (and several other companies) to submit a bid for manufacturing and delivering a 25,000 pound order of the private brand compound to Taylor. While the chemical composition of the Taylor compound differs from that of Fertikil, the manufacturing processes are very similar.
The Taylor compound would be produced in 1.000 pound lots. Each lot would require 30 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, and MZ-8) are all used in the production of Fertikil. BE-7 was used in another compound that Jenco discontinued several months ago. The supply of BE-7 that Jenco had on hand when the other compound was discontinued was not discarded. Jenco could sell its supply of BE-7 at the prevailing market price less $0.10 per pound selling and 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 Tavlor 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:
Row Material Pounds in Inventory Actual Price/Pound Current Market
When Purchased Price/Pound
CW-3 22,000 $0.80 $0.90
JX-6 5,000 0.55 0.60
MZ-8 8,000 1.40 1.60
BE-7 4,000 0.60 0.65
CN-5 5,500 0.75 (Salvage)
The current direct labor 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 of 400,000 total DLH with no overtime, is as follows:
Variable manufacturing overhead $ 4.50 per DLH
Fixed manufacturing overhead 7.50 per DLH
Combined rate $12.00 per DLH
Jenco's production manager reports that the present equipment and facilities are adequate to manufacture the Taylor compound. Therefore, the order would have no effect on total fixed manufacturing overhead costs. However, Jenco 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 Fertikil production to overtime. Jenco's rate for overtime hours is 1.5 times the regular pay rate, or $21 per hour. There is no allowance for any overtime premium in the predetermined overhead rate.
Required:
1. Jenco, has decided to submit a bid for a 25,000 pound order of Taylor Nursery's new compound. The order must be delivered by the end of the current month. Taylor Nursery has indicated that this is a one-time order that will not be repeated. Calculate the lowest price that Jenco could bid for the order without reducing its net operating income.