Chapter 3, Problem 3.38BE

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

Nestor Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials. For the coming year, Nestor Recycling estimates total manufacturing overhead to be $369,260. The company’s managers are not sure if direct labor hours (estimated to be 9,980) or machine hours (estimated to be 18,463 hours) is the best allocation base to use for allocating manufacturing overhead. Nestor bids for jobs using a 29% markup over total manufacturing cost.

After the new fiscal year began, Elliott Paper Supply asked Nestor Recycling to bid for a job that will take 1,975 machine hours and 1,600 direct labor hours to produce. The direct labor cost for this job will be $12 per hour, and the direct materials will total $25,600.

Requirements

1. 1. Compute the total job cost and bid price if Nestor 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 Nestor Recycling decided to use machine hours as the manufacturing overhead allocation base for the year.
3. 3. In addition to the bid from Nestor Recycling, Elliott Paper Supply received a bid of $125,500 for this job from Kitson Recycling. What are the ramifications for Nestor Recycling?