Question

Brodhead Manufacturing Company has constructed its own specialequipment to produce a newly developed product. A bid to constructthe equipment by an outside company was received for $1,200,000.00.The actual costs incurred by Brodhead to construct the equipmentwere as follows:

Direct Material ……………………………………………………………………………………………………$320,000.00

Direct Labor………………………………………………………………………………………………………. 200,000.00

It is estimated that incremental overhead costs for constructionamount to 140% of direct labor costs. In addition, fixed costs(exclusive of interest) of $700,000 were incurred during theconstruction period and allocated to production on the basis oftotal prime costs (direct labor plus direct material). The primecosts incurred to build the new equipment amounted to of the totalprime costs incurred for the period. The company follows the policyof capitalizing all possible costs on self-constructionprojects.

To assist in financing the construction of the equipment, a$500,000, 10% loan was acquired at the beginning of the six-monthconstruction period. The company carries no other debt except fortrade accounts payable. For simplicity, assume that allconstruction expenditures took place exactly midway through theproject: That is, all expenditures took place with three monthsremaining in the construction period. Compute the cost to beassigned to the new equipment.

Check Figure: Interest charges capitalized = $25,000