Reference no: EM132093436

ASSIGNMENT QUESTION -

Kaya Fertilizer Sdn Bhd (KFSB) manufactures one product, a combination fertilizer-weedkiller called Fertikil. The product is sold nationwide to retail nurseries and gardening stores. Siantan Nursery (SN) plans to sell a similar fertilizer-weedkiller through its regional nursery chain under its private label. SN has asked KFSB to submit a bid for a 25,000 kilograms order of the private brand compound. While the chemical composition of the SN compound differs from that of Fertikil, the manufacturing process is very similar. The SN compound would be produced in 1,000 kilogram batches. Each batch would require 60 direct labour hours and the following chemicals:

Chemicals	Quantity (kg)
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 KFSB has discontinued. This chemical was not sold or discarded because it does not deteriorate and KFSB has adequate storage facilities. KFSB could sell BE-7 at the prevailing market price, less 20 cents per kilogram for selling and handling expenses.

KFSB also has on hand a chemical called CN-5, 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 SN compound. The quantity of CN-5 in inventory has a salvage value of RM1, 000. Inventory and cost data for the chemicals that can be used to produce the SN compound are as follows:

Raw material	No. of kg in inventory	Actual price per kg when purchased	Current market price per kg
CW-3	22,000	RM1.60	RM0.90
JX-6	5,000	1.10	0.60
MZ-8	8,000	2.80	1.60
BE-7	4,000	1.20	0.65
CN-5	5,500	1.50	*

*Salvage value of RM1,000 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	RM4.50 per direct labour hour
Fixed manufacturing overhead	RM7.50 per direct labour hour
	RM12.00 per direct labour rate

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

Required:

1. Assume KFSB has decided to submit a bid for a 25,000 kilogram order of SN's new compound, to be delivered by the end of the current month. KSFB has indicated that this one-time order will not be repeated. Calculate the lowest price KFSB can bid for the order and not reduce its net profit.

2. Independently of your answer to requirement 1, assume that SN plans to place regular orders for 25,000 kilogram lots of the new compound during the coming year. SN expects that demand for Fertikil to remain strong, so the recurring orders from SN will put SN overs its two-shift capacity. However, production can be scheduled so that 60% of each SN order can be completed during regular hours, or Fertikil production could be shifted temporarily to overtime so that the SN orders could be produced on regular time. KFSB's production manager has estimated that the prices of all chemicals 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 KFSB should quote SN for each 25,000 kilogram order of the new compound, assuming that there will be recurring orders during the coming year. Assume that KFSB management believes new products sold on a recurring basis should be priced to cover their total production costs plus the standard markup.

3. Suppose KFSB has submitted a bid to SN. However, Dalton Sdn Bhd, a competitor to KFSB, has submitted a lower bid. Before accepting Dalton's bid, the owner of SN telephone his golfing friend, who is KFSB's production manager:

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

Discuss the ethical issues in this scenario.