Marscoro Company recently discontinued the manufacture of product J15. The production costs per unit of J15 are as follows:
There are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and the following alternatives are being considered:
I. Sell to an exporter for sale in a foreign country. The sales price to the exporter would be $12 per unit.
II. Remanufacture the products to convert them into model J16, a model that normally sells for $200. The additional cost to convert the J15 units would be $45; the standard cost to manufacture J16 is $125.
Presently, there is sufficient capacity to manufacture product J16 directly or to do the necessary conversion work on J15.
Determine the net benefit to Marscoro of each alternative and state your recommendation.
Relevant costs are costs incurred specifically to a certain alternative only. Relevant cost analysis is used to determine which of the available alternatives will be the most beneficial to the company.
Answer and Explanation:
Under alternative 1, we can recover $12 per unit of J15 and can still have enough capacity to manufacture product J16, thus the total net benefit would be:
- Net benefit (loss) = Amount recoverable from sale of J15 -Cost incurred form production of J15+ Margin on 800 units of J16
- Net benefit (loss) = ($12 per unit x 800 units) - ($119 per unit x 800 units) + ((($200 - $125 ) x 800 units))
- Net benefit (loss) = $9,600 -$95,200 + ($75 x 800 units)
- Net benefit (loss) = $9,600 -$95,200 + $60,000
- Net benefit (loss) = ($25,600)
Under alternative 2, we have to convert product J15 into product J16 in order for it to be sold at a higher price. However, note that the corresponding conversion of product J15 will also sacrifice the margin of product 16, thus there will be margin lost from the said conversion. To compute:
- Net benefit (loss) = Proceeds from conversion - -Cost incurred form production of J15 - Additional cost of conversion
- Net benefit (loss) = (J16 selling price x 800 units) - ($119 per unit x 800 units) - ($45 per unit x 800 units)
- Net benefit (loss) = ($200 x 800 units) - ($119 per unit x 800 units) - ($45 per unit x 800 units)
- Net benefit (loss) = $160,000 - $95,200 - $36,000
- Net benefit (loss) = $28,800
Based on our computation, we have to choose alternative 2, since it will yield us a benefit of $28,800 compared to alternative 1 which will result to a loss of $25,600.
Learn more about this topic:
from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 10