Question

Acme Company has 3,000 light fixtures that were allocated a joint cost of $30,000 and are now obsolete. If the fixtures are reworked for $10,000, they could be sold for $18,000. Alternatively, the light fixtures could be sold for $13,000 to a jobber located in a distant city. If it would cost $5,000 to store the fixtures until the jobber takes them, what is the preferred alternative?

A) the fixtures should be reworked as this would minimize the loss.

B) the fixtures should be sold to the jobber.

C) the fixtures should be written off as a period cost and dumped as this would be more advantageous tax-wise.

D) management is indifferent between selling to the jobber and reworking the fixtures.

Answer 1

The correct answer is D) management is indifferent between selling to the jobber and reworking the fixture

Explanation

Firstly joint cost is sunk cost as it has already been incurred.

Now the management has to options that is rework or sell to job worker. We have to calculate net benefit for both options.

Net Benefit if company reworks and sells

= benefit- rework cost

= $ 18000 - $ 10000

= $ 8000

Net Benefit if company sell to job worker

= sale price to job worker - storage cost

= $ 13000 - $ 5000

= $ 8000

In both cases net benefit is same, so the management is indifferent between both the options. So the correct answer is part d)