Swift Ltd manufacturescase study

Pricing a special order and business ethics Swift Ltd manufactures one product, a combination fertilizer-weedier called Fertile. The product is sold nationwide to retail nurseries and gardening stores.

Taylor Nursery plans to sell a similar fertilizer-weedier through its regional nursery chain under TTS private label. Taylor has asked Swift to submit a bid for a 25 000 kilogram order of the private brand compound. While the chemical composition of the Taylor impound differs from that of Fertile, the manufacturing process is very similar.

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The Taylor compound would be produced in 1000 kilogram batches. Each batch would require 60 direct labor hours and the following chemicals: rhea first three chemicals (OCW-3, XX-6, MS-8) are all used in the production of Fertile. E-7 was used in a compound that Swift has discontinued.

This chemical was not sold or discarded because it does not deteriorate and Swift has adequate storage facilities. Swift could sell BE-7 at the prevailing market price, less 20 cents per illogical for selling and handling expenses.

Swift also has on hand a chemical called CNN-5, manufactured for use in another product that is no longer produced. CNN-5, which cannot be used in Fertile, can be substituted for OCW-3 on a one-for-one basis without affecting the quality of the Taylor compound. The quantity of CNN-5 in inventory has a salvage value of $1000. Inventory and cost data for the chemicals that can be used to produce the Taylor compound are as follows: The current direct labor rate is $14 per hour.

The manufacturing overhead rate is established at the beginning of the year using direct labor hours as the base.

The predetermined overhead rate for the current year, based on a two-shift capacity of 400 000 total direct labor hours with no overtime, is as follows: Swifts production manager reports that the present equipment and facilities are adequate for manufacturing the Taylor compound. However, Swift is within 800 hours of its two-shift capacity this month before it must schedule overtime. If need be, the Taylor compound could be produced on regular time by shifting a portion of Fertile production to overtime.

Swifts pay rate for overtime hours is one-and-a half the regular pay rate, or $21.

00 per hour. There is no allowance for any overtime premium n the manufacturing overhead rate. Swifts standard markup policy for new products is 25 per cent of absorption manufacturing cost. Required: 1 . Assume Swift Ltd has decided to submit a bid for a 25 000 kilogram order of Tailor’s new compound, to be delivered by the end of the current month. Taylor has indicated that this one-time order will not be repeated.

Calculate the lowest price Swift can bid for the order and not reduce its net profit. Independently of your answer to requirement 1, assume that Taylor Nursery plans to place regular orders tort 2 kilogram lots to the new compound during the coming year. Swift expects the demand for Fertile to remain strong, so the recurring orders from Taylor will put Swift over its two-shift capacity. However, production can be scheduled so that 60 per cent of each Taylor order can be completed during regular hours, or Fertile production could be shifted temporarily to overtime so that the Taylor orders could be produced on regular time.

Swifts 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 Swift Ltd should quote Taylor Nursery for each 25 000 kilogram order of the new compound, assuming that there will be recurring orders during the coming year. Assume that Swifts management believe new products sold on a recurring basis should be priced to cover their total production costs plus the standard markup. 3. Suppose Swift Ltd has submitted a bid to Taylor Nursery.

However, Dalton Industries, a competitor to Swift, has submitted a lower bid.

Before accepting Talon’s bid, the owner of Taylor Nursery telephones his golfing friend, who is Swifts production manager: Vive got some bad news for you. Swifts been outbid on the private label order by Dalton Industries. Vive been thinking, though. It looks to me like Swift included some cost in its bid that could be eliminated. If you’d like to revise the Swift bid, we might be able to steer this deal your way.

If it would help, I can show Ho Talon’s figures Discuss the ethical issues in this scenario.