Vickery Machining Company is nearly finished constructing a specially designed piece of machining equipment when...
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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 of the costs in this scenario as a sunk cost, incremental cost, or incremental revenue.
Cost incurred to-date:
Costs to rebuild:
Potential Sales Price:
b.What should Vickery do?
Rebuild the equipment or scrap the equipment?
Answer & Explanation
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