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.