Reference no: EM131794467

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.