On January 1,2014,Mercury Airlines Contracted with Dover Aircraft to Construct

question 30

Essay

On January 1,2014,Mercury Airlines contracted with Dover Aircraft to construct an aircraft to Mercury's specifications at a cost of $2,000,000.During 2014,Mercury paid Dover $400,000 on January 1,and another $250,000 on September 30.On January 1,Mercury borrowed $360,000 at 13% to partially finance the construction,an obligation still outstanding at the end of 2014.The remaining amount paid to Dover was financed from available working capital.Mercury has approximately $1,600,000 of additional debt outstanding at an average interest cost of 12%.
Required:
What is the total capitalized cost of the aircraft under construction at the end of 2014?

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Definitions:

Total Product

The total output of goods or services produced by a firm or industry within a specified period.

Negative Marginal Returns

A situation where adding an additional factor of production results in lower output per unit.

Fixed Input

Inputs that remain constant for a period of time and do not change with the level of output.

Total Variable Cost

The sum of expenses that vary directly with the level of production, such as raw materials and direct labor.