Question
Miami Industries received an order for a piece of special machinery from Jay Company. Just as Miami completed the machine, Jay Company declared bankruptcy, defaulted
Miami Industries received an order for a piece of special machinery from Jay Company. Just as Miami 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.
Miamis manufacturing manager identified the costs already incurred in the production of the special machinery for Jay Company as follows:
Direct material | $ | 16,600 | |||||
Direct labor | 21,400 | ||||||
Manufacturing overhead applied: | |||||||
Variable | $ | 10,700 | |||||
Fixed | 5,350 | 16,050 | |||||
Fixed selling and administrative costs | 5,405 | ||||||
Total | $ | 59,455 | |||||
Another company, Kaytell Corporation, will buy the special machinery if it is reworked to Kaytells specifications. Miami Industries offered to sell the reworked machinery to Kaytell as a special order for $68,400. Kaytell agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework the machinery to Kaytells specifications are as follows:
Direct material | $ | 6,200 | |
Direct labor | 4,200 | ||
Total | $ | 10,400 | |
A second alternative available to Miamis management is to convert the special machinery to the standard model, which sells for $62,500. The additional identifiable costs for this conversion are as follows:
Direct material | $ | 2,850 | |
Direct labor | 3,300 | ||
Total | $ | 6,150 | |
A third alternative for Miami Industries is to sell the machine as is for a price of $52,000. However, the potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered a $7,000 down payment, with the remainder due upon delivery.
The following additional information is available regarding Miamis operations.
- The sales commission rate on sales of standard models is 2 percent, while the rate on special orders is 3 percent.
- Normal credit terms for sales of standard models are 2/10, net/30. This means that a customer receives a 2 percent discount if payment is made within 10 days, and payment is due no later than 30 days after billing. Most customers take the 2 percent discount. Credit terms for a special order are negotiated with the customer.
- The allocation rates for manufacturing overhead and fixed selling and administrative costs are as follows:
Manufacturing costs: | |
Variable | 50% of direct-labor cost |
Fixed | 25% of direct-labor cost |
Fixed selling and administrative costs | 10% of the total of direct-material, direct-labor, and manufacturing-overhead costs |
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