Reference no: EM132972296

Question - A company has been making a machine to order for a customer, but the customer has since gone into liquidation, and there is no prospect that any money will be obtained from the winding up of the company.

Costs incurred to date in manufacturing the machine are $50,000 and progress payments of $15,000 had been received from the customer prior to the liquidation. The sales department has found another company willing to buy the machine for $34,000 once it has been completed.

To complete the work, the following costs would be incurred:

(a) Materials: these have been bought at a cost of $6,000. They have no other use, and if the machine is not finished, they would be sold for scrap for $2,000.

(b) Further labour costs would be $8,000. Labour is in short supply, and if the machine is not finished, the work force would be switched to another job, which would earn $30,000 in revenue, and incur direct costs of $12,000 and absorbed (fixed) overhead of $8,000.

(c) Consultancy fees $4,000. If the work is not completed, the consultant's contract would be cancelled at a cost of $1,500.

(d) General overheads of $8,000 would be added to the cost of the additional work.

Assess whether the new customer's offer should be accepted.