Analyze Alternative Actions: Auer Company had received an order for a piece of special machinery from Jay Company. Just as Auer Company completed the machine. Jay Company declared bankruptcy, defaulted on the order, and forfeited the 10 percent deposit paid on the selling price of $72,500. Auer's manufacturing manager identified the costs already incurred in the production of the special machinery for Jay as follows:

Another company, Kaytell Corporation, would be interested in buying the special machinery if it is reworked to Kaytell's specifications. Auer offered to sell the reworked special machinery to Kaytell as a special order for a net price of $68,400. Kaytell has agreed to pay the net price when it takes delivery in two months. The additional identifiable costs to rework the machinery to the specifications of Kaytell are as follows:

A second alternative available to Auer is to convert the special machinery to the standard model. The standard model lists for $62,500. The additional identifiable costs to convert the special machinery to the standard model are:

A third alternative for the Auer Company is to sell, as a special order, the machine as is (that is, without modification) for a net price of $52,000. However, the potential buyer of the unmodified machine does not want it for 60 days. The buyer offers a $7,000 down payment, with final payment upon delivery. The following additional information is available regarding Auer's operations:

1. Sales commission rate on sales of standard models is 2 percent, while sales commission rate on special orders is 3 percent. All sales commissions are calculated on net sales price (that is, list price less cash discount, if any).

2. Normal credit terms for sales of standard models are 2/10, net/30. Customers take the discounts except in rare instances. Credit terms for special orders are negotiated with the customer.

3. The application rates for manufacturing overhead and the nonmanufacturing costs are as follows:

4. Normal time required for rework is one month. Auer does not consider the time value of money in analysis of special orders and projects when the time period is less than one year because the effect is not significant Required:

a. Determine the dollar contribution that each of the three alternatives will add to the Auer Company's before-tax profits.

b. If Kaytell makes Auer a counter offer, what is the lowest price Auer Company should accept for the reworked machinery from Kaytell? Explain your answer.

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Direct materials used Direct labor incurred Overhead applied: Manufacturing: Variable Fixed Nonmanufacturing: $16,600 21,400 $10,700 5,350 16,050 5,405 Total cost $59,455