Question

Matadors, Inc. constructed its own special equipment. Actual costs incurred to construct the equipment were as follows: Direct materials Direct labor $550,000 250,000 Incremental overhead costs are estimated at 125% of direct labor costs. Fixed costs (exclusive of interest) are allocated to production based on prime costs (direct materials and direct labor). Fixed costs (exclusive of interest) for the period were $800,000. Prime costs for the construction project were 40% of total prime costs for the period. Matadors capitalizes all possible costs on self-construction projects. To assist in financing the construction of the equipment, a $750,000, 8% loan was acquired at the beginning of the ten-month construction period. Matador carries no other debt except for trade accounts payable. Assume that all construction expenditures took place exactly midway through the project. Compute the cost to be assigned to the new equipment.

Answer 1

	Particulars	Amount $
	Direct material	550000
	Direct labour	250000
	overhead costs	312500
	125% of Direct labour
A	Total Prime Cost	1112500
B	Interest Cost on Loan=	750000*8%*2/12
		10000
	Project Prime cost (A+B)	1122500
	Construction Prime cost is 40%             = of Total Prime cost	1122500*40%
	Cost Of Equipment                                      =	449000