Texts: Keller Technology produces specialized machinery customized to their clients' needs. Barings Systems had ordered a custom machine five months ago and paid a 5% deposit on the $275,000 machine. The cost of producing the machine for Barings is as follows:
Direct materials: $63,400
Direct labor: $57,600
Manufacturing overhead applied: $28,800
Variable manufacturing costs: $43,200
Fixed selling and administrative costs: $16,420
Total: $209,420
The allocation rates for the manufacturing overhead and fixed selling and administrative costs are:
Variable: 50% of direct labor costs
Fixed: 25% of direct labor costs
Fixed selling and administrative costs: 10% of the total of direct material, direct labor, and manufacturing overhead costs
Just as Keller completed producing the machine, Barings went into receivership. As Barings was unable to pay for the machine, the deposit paid to Keller was forfeited. Keller is now considering the options available to them with regards to the machine that Barings had ordered. The production manager has identified three options for Keller.
The sales commission rate on sales is 3 percent.
REQUIRED:
Option A: Pegasus Engineering is willing to buy the Barings machine if it can be reworked to Pegasus' specifications. The reworked machine will be sold to Pegasus as a special order for $231,900. The additional identifiable costs to rework the machine to Pegasus' requirements are as follows:
Direct materials: $19,400
Direct labor: $13,200
Total: $32,600
Option B: It is possible to convert the Barings machine into a standard machine that Keller can normally sell for $199,375. However, as this is a conversion of a custom machine, a 4% discount will be offered to attract a buyer. In order to complete the conversion, Keller will need to incur the following costs:
Direct materials: $7,880
Direct labor: $9,400
Total: $17,280
Option C: Keller will sell the machine in its current completed state for $185,000.
OHDD: 4
73%
