Question

Cornerstone, Inc. has $125,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There the goods could be sold for $80,000. What alternative is more desirable and what is the relevant cost for that alternative?

		Sell "as is," $125,000.
		Clean and ship to outlet center, $148,000.
		Clean and ship to outlet center, $23,000.
		Clean and ship to outlet center, $103,000.
		Neither alternative is desirable, as both produce a loss for the firm.

Answer 1

Option 1 - Sold 'as is'

Net Revene if Sold 'as is' = $45,000

Option 2 - Sold after cleaning

Gross Revenue	80,000
Additional Cost of cleaning & shipping	(23,000)
Net Revenue	57,000

Accordingly, alternative of 'Clean and ship to outlet center' be accepted. Relevant cost will be $23,000

Correct Answer - Option 'Clean and ship to outlet center, $23,000'