Question

Edison Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $45,000. If the lamps are reworked for $20,000, they could be sold for $37,000. Alternatively, the lamps could be sold for $9,000 as scrap. What should Edison Company do with the lamps? Why? Be sure to show your supporting calculations for your recommended course of action.

Answer 1

Ans- Applying Differential or Incremental Cost Approach for decision making:

Option-1- Rework Option
Sale Price	$37,000
Less: Rework Cost	$20,000
Net Cash Inflow (Incremental Value)	$17,000

Option -2- Sold the lamp as Scrap
Net Cash Inflow (Incremental Value or Scrap Value)	$9,000

Conclusion :-

Edison company should sell the lamps after rework since it results in an incremental revenue of $17,000. Edison's operation income would be higher by $8,000 if company adopted rework option.

Note:-

Manufacturing cost of $45,000 is a sunk cost since it is already incurred and hence not relevant for decision making.