Question

Vickery Machining Company is nearly finished constructing a specially designed piece of machining 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 $100,000.
a. identify each cost in this scenario as a sunk cost, incremental cost, or incremental revenue.
b. what should Vickery do?
A.
1. cost incurred to date
2. cost to rebuild
3. potential sales price
B. what should vickery do?

Answer 1

Requirement 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
Requirement 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