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.
Miami’s 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:
Viable ......... $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 Kaytell’s 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 Kaytell’s specifications are as follows:
Direct material ............ $ 6,200
Direct labor ............. 4,200
Total ............... $ 10,400
A second alternative available to Miami’s 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:
Died material ............ $2,850
Owed 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 Miami’s 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 fir sales of standard models are 2/10, net/30. This means that a customer receives a 2 percent discount if payment is made within l0 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 direct material, direct labor
and manufacturing overhead costs.
Normal time required for rework is one month.
Required:
1. Determine the dollar contribution each of the three alternatives will acid to Miami Industries before-tax profit.
2. If Kaytell makes Miami Industries a counteroffer, what is the lowest price Miami should accept for the reworked machinery horn Kaytell? Explain your answer.
3. Discuss the influence fixed manufacturing-overhead cost should have on the sales price quoted by Miami Industries for special orders.