Exercise 10-5 Sell or process further LO P2 Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of $22 each. This year's model is superior to last year's, and the 7,000 units cannot be sold at last year's regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each or (2) they can be processed further at a cost of $125,000 and then sold for $25 each. Should Varto sell the products as is or process further and then sell them?

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Business

Owen Lin

12 May, 12:44

Exercise 10-5 Sell or process further LO P2 Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of $22 each. This year's model is superior to last year's, and the 7,000 units cannot be sold at last year's regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each or (2) they can be processed further at a cost of $125,000 and then sold for $25 each. Should Varto sell the products as is or process further and then sell them?

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Answers (1)

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Cameron Aguilar · Answer 1

It is more profitable to sell the units as they are, without any further process.

Explanation:

Giving the following information:

The number of units = 7,000

Option 1:

Sale for $8 now

Option 2:

processed further for $125,000 and then sold for $25 each

The cost of $22 per unit is a sunk cost, it shouldn't be taken into account in the decision making. It will remain constant in both options.

We need to calculate the effect on the income of both options:

Option 1:

Effect on income = 7,000*8 = $56,000

Option 2:

Effect on income = 7,000*25 - 125,000 = $50,000

It is more profitable to sell the units as they are, without any further process.