Question

	A company has an inventory of 1,400 assorted parts for a line of missiles that has been discontinued. The inventory cost is $74,000. The parts can be either​ (a) remachined at total additional costs of $ 25,500 and then sold for $32,000 or​ (b) sold as scrap for $2,000. Which action is more​ profitable? Show your calculations.
2.	A​ truck, costing $100,000 and​ uninsured, is wrecked its first day in use. It can be either​ (a) disposed of for $18,000 cash and replaced with a similar truck costing $102,500 or​ (b) rebuilt for $85,500​, and thus be​ brand-new as far as operating characteristics and looks are concerned. Which action is less​ costly? Show your calculations.

Answer 1

Solution 1:

Option a - Remachined at a total additional cost of $25,500 and sold for $32,000

Net revenue = Sale value - additional cost = $32,000 - $25,500 = $6,500

Option b - Sold as scarp for $2,000

Net revenue = $2,000

The inventory cost of $74,000 is sunk cost and irrelevant for decesion making.

Option a is providing higher revenue therefore inventory will be remachined.

Solution 2:

Option a: disposed of for $18,000 and buy a new truck for $102,500:

Net cost = $102,500 - $18,000 = $84,500

Option b: Rebuilt existing truck for $85,500

Net Cost = $85,500

Truck cost of $100,000 is sunk cost and irrelevant for decesion making

As net cost of option a is lowest, hence company should dispose off the truck and buy a new one.