Question

Encore Corp. has 280 units of finished product in inventory that originally cost $70,000 to manufacture. It could be sold as scrap to a buyer in Brazil for $42,000 minus transportation cost of $15 per unit. Alternatively, the 280 units of inventory could be sold domestically for $62,000 if it is processed further at an additional cost. Encore processes the old inventory further, but that decision results in a decrease in Encore's net income of $3,000. Calculate the additional processing cost of the old inventory (round to nearest $1)

Answer 1

Sale revenue (if sold as scrap ) = $42,000

Transportation cost per unit = $15

Number of units = 280

Total Transportation cost = Transportation cost per unit x Number of units

= 15 x 280

= $4,200

Net income if sold as scrap = Sale revenue- Total Transportation cost

= 42,000-4,200

= $37,800

Sales revenue after further processing = $62,000

Further processing cost = ?

Decrease in net income after further processing = $3,000

Net income after further processing = Sales revenue after further processing - Further processing cost

= 62,000-Further processing cost

Net income after further processing = Net income if sold as scrap - Decrease in net income after further processing

62,000-Further processing cost = 37,800-3,000

62,000-Further processing cost = 34,800

Further processing cost = 62,000-34,800

= $27,200

The additional processing cost of the old inventory = $27,200