A company has 7,000 obsolete toys carried in inventory at manufacturing cost of P6 per unit. If...

Question:

A company has 7,000 obsolete toys carried in inventory at manufacturing cost of P6 per unit. If the toys are reworked for P2 per unit they could be sold for P3 per unit. If the toys are scrapped, they could be sold for P1.85 per unit. Which alternative is more desirable (rework or scrap), and what is the total peso amount of the advantage of that alternative?

Relevant Cost:

In making decisions, costs may be relevant or irrelevant. A cost is considered as relevant when it will affect the company?s decisions, usually differs among alternatives. This means that it can result in additional profit or loss in the company when such alternative is selected. One example of relevant cost is avoidable cost.

Answer and Explanation:

Selling it at scrap:

Obsolete Toys 7,000
Selling Price 1.85
Total Revenue 12,950
Expenses 0
Profit 12,950


Selling it after rework:

Obsolete Toys 7,000
Selling Price 3.0
Total Revenue 21,000


Obsolete Toys 7,000
Cost of Rework 2.00
Total Cost 14,000


Total Revenue 21,000
Total Cost 14,000
Profit 7,000


Considering the computations, selling it at scrap will result to a higher profit, 12,950, as compared to the idea of reworking it which only resulted in a profit of 7,000.


To compute for the advantage of selecting the selling it as scrap decision:

Selling Price at Scrap 1.85
Gross profit after Reworked (3.00-2.00) 1.00
Difference 0.85
Obsolete Toys 7,000
Revenue Advantage 5,950


Selecting the obsolete toys at scrap will result in 5,950 revenue advantage as compared to the decision of selling it after reworked.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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