Excalibur

Excalibur received an order for a piece of special machinery from Rex Company. Just as Excalibur completed the machine, Rex Company declared bankruptcy, defaulted on the order, and forfeited the 10% deposit paid on the selling price of $217,500.

Excalibur's manufacturing manager identified the costs already incurred in the production of the special machinery for Rex Company as follows:

Direct materials $49,800

Direct labor 64,200

MOH applied:

Variable 32,100 Fix 16,050 48,150

Fixed S&A 16,215

Total $178,365

Another company, Kaytell Corporation, will buy the special machinery if it is reworked to Kaytell's specifications. Excalibur offered to sell the reworked machinery to Kaytell as a special order for $205,200. Kaytell agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework the machinery to Kaytell's specifications are as follows:

Direct materials $18,600

Direct labor 12,600 $31,200

A second alternative available to Excalibur's management is to convert the special machinery to the standard model, which sells for $187,500. The additional identifiable costs for this conversion are as follows:

Direct materials $8,550

Direct labor 9,900

$18,450

A third alternative for Excalibur is to sell the machine as is for a price of $156,000. However, the potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered a $21,000 down payment, with the remainder due upon delivery.

The following additional information is available regarding Excalibur's operations.

The allocation rates for MOH and fixed S&A costs are:

Manufacturing costs:

Variable 50% of direct-labor cost

Fixed 25% of direct-labor cost

Fixed S&A 10% to the total of direct-material, direct-labor and MOH costs

The sales commission rate on salaries of standard models is 2%, while the rate on special orders is 3%.

normal credit terms for sales of standard models are 2/10, net/30. This means that a customer reveices a 2% discount if payment is made within 10 days, and payment is due no later than 30 days after billing. Most customers take the 2% discount. Credit terms for a special order are negotiated with the customer.

Normal time required for rework is one month.

Required:

1. Determine the dollar contribution each of the three alternatives will add to Excalibur's before-tax profit.

2. If Kaytell makes Excalibur a counteroffer, what is the lowest price Excalibur should accept for reworked machinery from Kaytell? Explain your answer.

3. Discuss the influence fixed manufacturing-overhead cost should have on the sales price quoted Excalibur for special orders.