Question

LO21-2, LO21-3, LO21-4 BRIEF EXERCISE 21.10 Scrap or Rebuild Decision Vickery Machining Company is nearly finished constructing a specially designed piece of machin- ing equipment when the customer declares bankruptcy and cannot pay for the equipment. Vickery estimates that the cost associated with making the uncompleted equipment was $1,800,000. Since the machining equipment was specially designed for the customer, there are no other buyers for the equipment unless it is rebuilt. The cost to rebuild is $600,000, after which the product can be sold for $750,000, or the equipment can be scrapped for S100,000. Identify each of the costs in this scenario as sunk, out-of-pocket, or incremental. What should Vickery do?

Answer 1

Solution:

a. Identification of each cost in this scenerio:

		Amount	Nature of cost	Reasons
1	Cost Incurred to date	1800000	Sunk Cost	Since it is already incurred and there are no buyers
2	Cost to rebuild	600000	Incremental cost	Since it is costs to make machine ready for sale
3	Potential selling price	750000	Incremental Revenue	Price we will receive by selling the machine

b.

# Vickery should rebuild the machine and sell it to another buyer. It should not be scrapped.
# It is due to fact that there is incremental profit of $150000 in rebuidling and selling it to another customer