Chapter 3, Problem 3.24AE

Compare bid prices under two different allocation bases (Learning Objectives 3 & 4)

Olney Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials. For the coming year, Olney estimates total manufacturing overhead to be $370,000. The company’s managers are not sure if direct labor hours (estimated to be 10,000) or machine hours (estimated to be 14,800 hours) is the best allocation base to use for allocating manufacturing overhead. Olney bids for jobs using a 31% markup over total manufacturing cost.

After the new fiscal year began, Leftwich Paper Supply asked Olney Recycling to bid for a job that will take 2,020 machine hours and 1,650 direct labor hours to produce. The direct labor cost for this job will be $11 per hour, and the direct materials will total $25,400.

Requirements

1. 1. Compute the total job cost and bid price if Olney Recycling decided to use direct labor hours as the manufacturing overhead allocation base for the year.
2. 2. Compute the total job cost and bid price if Olney Recycling decided to use machine hours as the manufacturing overhead allocation base for the year.
3. 3. In addition to the bid from Olney Recycling, Leftwich Paper Supply received a bid of $126,000 for this job from Drund Recycling. What are the ramifications for Olney Recycling?