Question

Double Duty, a combination fertilizer–weed killer, is Alanco’s only product. It is sold nation- wide 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
JX–6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
MZ–8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
BE–7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Required:
1. Alanco has decided to submit a bid for a 25,000-kilogram order of Taylor Nursery’s new com- pound. 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 Alanco could bid for the order without reducing its operating income.
2. Refer to the original data. Assume that Taylor Nursery plans to place regular orders for 25,000-kilogram lots of the new compound during the coming year. Alanco expects the demand for Double Duty to remain strong. Therefore, the recurring orders from Taylor Nursery would put Alanco over its two-shift capacity. However, production could be scheduled so that 60% of each Taylor Nursery order could be completed during regular hours. As an- other option, some Double Duty production could be shifted temporarily to overtime so that the Taylor Nursery orders could be produced on regular time. Current market prices are the best available estimates of future market prices. Alanco’s standard markup policy for new products is 40% of the full manufacturing cost, including fixed manufacturing overhead. Calculate the price that Alanco would quote Taylor Nursery for each 25,000-kilogram lot of the new compound, assuming that it is to be treated as a new product and this pricing policy is followed.


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  • CreatedJuly 08, 2015
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