Question

A company has an inventory of 1,300 assorted parts for a line of missiles that has been discontinued. The inventory cost is $71,000. The parts can be either (a) remachined at total additional costs of $27,500 and then sold for $31,500 or (b) sold as scrap for $6,000. Which action is more profitable? Show your calculations.

Answer 1

	Calculation of profit in case A and B
	Case A- Remachined then sold
	Sale value after remachine	$31,500
	Less: Costs to be incurred for remachine	($27,500)
	Net profit	$4,000
	Case B- sold as scrap
	Sale value of scrap	$6,000
	Less: Costs to be incurred for Sale	$0
	Net profit	$6,000
	Net profit is high in case of sale as scrap by $2,000 ($6,000-$4,000)
Ans	Which action is more profitable?
	Option (B) is preferable
	Note: Inventory cost $71,000 is sunk cost which is already incurred cannot be recovered since not relevant for decision making