Delicious Sdn Bhd manufactures one product, a ready-made paste to be used in western cuisine, called Fabulous. The product is sold nationwide to various restaurants and grocery markets. Temptation plans to sell a similar paste through its regional restaurant chain under its private label. Temptation has asked Delicious to submit a bid for a 25 000 kilogram order of the private brand paste. While the composition of the Temptation paste differs from that of Fabulous, the manufacturing process is very similar. The Temptation paste would be produced in 1000 kilogram batches. Each batch would require 60 direct labour hours and the following ingredients:

Ingredients	Quantity (kg)
Cayenne pepper	400
Oregano	300
Rosemary	200
Thyme	100

The first three ingredients (Cayenne pepper, Oregano, Rosemary) are all used in the production of Fabulous. Thyme was used in a product that Delicious has discontinued. This ingredient was not sold or discarded because it is not perishable and Delicious has adequate storage facilities. Delicious could sell Thyme at the prevailing market price, less 20 cents per kilogram for selling and handling expenses.

Delicious also has on hand ingredient, Chilli pepper, to be used in another product that is no longer produced. Chilli pepper, which cannot be used in Fabulous, can be substituted for Cayenne pepper on a one-for-one basis without affecting the quality of the Temptation paste. The quantity of Chilli pepper in inventory has a salvage value of RM1000. Inventory and cost data for the ingredients that can be used to produce the Temptation paste are as follows:

Raw material	No. of kg in inventory	Actual price per kg when purchased (RM)	Current market price per kg (RM)
Cayenne pepper	22 000	1.60	0.90
Oregano	5 000	1.10	0.60
Rosemary	8 000	2.80	1.60
Thyme	4 000	1.20	0.65
Chilli pepper	5 500	1.50	*

* salvage value of RM1000 for entire inventory on hand

The current direct labour rate is RM14 per hour. The manufacturing overhead rate is established at the beginning of the year using direct labour hours as the base. The predetermined overhead rate for the current year, based on a two-shift capacity of 400 000 total direct labour hours with no overtime, is as follows:

Variable manufacturing overhead	RM 4.50	per direct labour hour
Fixed manufacturing overhead	RM 7.50	per direct labour hour
Combined rate	RM12.00	per direct labour hour

Delicious’ production manager reports that the present equipment and facilities are adequate for manufacturing the Temptation paste. However, Delicious is within 800 hours of its two-shift capacity this month before it must schedule overtime. If need be, the Temptation paste could be produced on a regular time by shifting a portion of Fabulous production to overtime. Delicious’ pay rate for overtime hours is one-and-a-half times the regular pay rate, or RM21 per hour. There is no allowance for any overtime premium in the manufacturing overhead rate. Delicious’ standard markup policy for new product is 25 per cent of absorption manufacturing cost.

Required:

1)    Assume Delicious Sdn Bhd decided to submit a bid for 25 000 kilogram order of Temptation’s new paste, to be delivered by the end of the current month. Temptation has indicated that this one-time order will not be repeated. Calculate the lowest price Delicious can bid for the order and not reduce its net profit.

2)    Independent of your answer to requirement 1, assume that Temptation plans to place regular orders for 25 000 kilogram lots of the new paste during the coming year. Delicious expects the demand for Fabulous to remain strong, so the recurring orders from Temptation will put Delicious over its two-shift capacity. However, production can be scheduled so that 60 per cent of each Temptation order can be completed during regular hours, or Fabulous production could be shifted temporarily to overtime so that the Temptation orders could be produced on regular time. Delicious’ production manager has estimated that the prices of all ingredients will stabilize at the current market rates for the coming year. All other manufacturing costs are expected to be maintained at the same rates or amounts. Calculate the price Delicious Sdn Bhd should quote Temptation for each 25 000 kilogram order of the new paste, assuming that there will be recurring orders during the coming year. Assume that Delicious’ management believes new products sold on a recurring basis should be priced to cover their total production costs plus the standard markup.

3)    Suppose Delicious Sdn Bhd has submitted a bid to Temptation. However, Lazat Kitchen, a competitor to Delicious, has submitted a lower bid. Before accepting Lazat’s bid, the owner of Temptation telephones his close friend, who is Delicious’ production manager:

I’ve got some bad news for you. Delicious’ been outbid on the private label order by Lazat Kitchen. I’ve been thinking, though. It looks to me like Delicious included some cost in its bid that could be eliminated. If you’d like to revise the Delicious bid, we might be able to steer this deal your way. If it would help, I can show you Lazat’s figures.

Discuss the behavioural issues in this situation.

Answer rating: 100% (QA)

1 The lowest price Delicious can bid for the order and not reduce its net profit is RM14250 This is ... View the full answer