Mat Machinery has received an order from Dewey Sales Corp. for special machinery. Dewey pays Mat Machinery a deposit of 10 percent of the sales price for the order. Just before the order is completed, Dewey Sales Corp. declares bankruptcy. Details of the transaction from Mat’s records show the following:
Sale price.............. $ 80,000
Cost incurred:
Direct materials.......... 15,000
Direct labor.............. 25,000
Overhead applied Variable..... 12,500
Fixed............... 6,250
Fixed administration costs...... 5,875

Raytell Corp. offers to buy the machinery for $ 68,000 if it is reworked to its specifications. Additional costs for reworking are
Materials—$ 5,000 Labor—$ 6,000
A second alternative is to convert the machine to a standard model, which has a list price of $ 64,500. Converting the machine will require additional labor of $ 2,000 and materials of $ 6,500.
The third alternative is to sell the machine as- is for $ 55,000, net of discount. For commission purposes, this is treated as- a “standard” model.
Sales commissions are 2 percent on special orders and 1 percent on standard models. Raytell is considered a special order. All sales commissions are calculated on sales price, net of discount. A discount of 2 percent of the sales price is given on standard models.
Application rates for manufacturing overhead on all work, including rework and conversion, are
Variable 50 percent of direct labor cost
Fixed 25 percent of direct labor cost
Administration overheads are
Fixed 10 percent of direct labor, materials, and manufacturing overhead


Which of the three alternatives should be chosen?

  • CreatedDecember 15, 2014
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