Question

Nicholls Corp. has some materials that originally cost $74,600. The materials have a scrap value of $57,400 as is, but if reworked at a cost of $3,500, could be sold for $59,700. Should the consider rework and sell the materials or should it sell it as scrap? Why?

Answer 1

Cost benefit analysis of matrial sold after rework
Particulars	$	$
Sales Revenue		59700
Less:Relevant Cost
Cost of rework	3500
Opportunity cost- sale of scrap	57400
Relevant Cost		60900
Benefit/(Loss)		-1200
Decision: As there is a Loss of $1200 on selling the material after rework, it is better that the company sells the material directly as scrap.
Note:Original cost of material is irrelevant in decision making as it is a sunk cost.