Question

Bonita Industries has old inventory on hand that cost $18750. Its scrap value is $25000. The inventory could be sold for $62500 if manufactured further at an additional cost of $18750. What should Bonita do?

Manufacture further and sell it for $62500

Sell the inventory for $25000 scrap value

Hold the inventory at its $18750 cost

Dispose of the inventory to avoid any further decline in value

Answer 1

Further processing: The inventory is processed further if it is expected to bring an incremental income on further processing it.

In this case, the historical cost or sunk cost is an irrelevant cost for the incremental analysis.

Computation of profit under both the scenarios:

(in $)

Particulars	If inventory is sold for scrap	Manufacture further
Sale value	$ 25000	$ 62500
Less-
Cost of inventory	(18750)	(18750)
Additional cost of further processing	0	(18750)
PROFIT	6250	25000

Since, estimated profit from further processing the inventory option gives higher profit than selling it at scrap, it is recommended that Bonita should manufacture the inventory further at an additional cost of $18,750 and sell it for $62,500

It is not advisable to hold the inventory because there is a chance of further loss of value of inventory.