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Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 340...

Question:

Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 340 defective fans in inventory, which cost $59 each to manufacture. These defective units can be sold as is for $23 each, or they can be processed further for a cost of $41 each and then sold for the normal selling price.

Stooge Enterprises would be better off by a:

a. $9,860 net increase in operating income if the ceiling fans are replaced.

b. $23,800 net increase in operating income if the ceiling fans are sold as is.

c. $23,800 net increase in operating income if the ceiling fans are repaired.

d. $9,860 net increase in operating income if the ceiling fans are sold as is.

Relevant Cost:

In deciding whether a item will be made or bought or sell as it is or processed further, the incremental costs to be incurred are considered as relevant. Relevant cost refers to those cost that differ between alternatives, meaning, said cost will not be incurred in case one of the alternatives will be selected.

Answer and Explanation:

Answer: a. $9,860 net increase in operating income if the ceiling fans are replaced.

Option 1: Selling the defective units as it is.

Sales for defective units (340*23) 7,820
Cost of Defective Units (340*59) -20,060
Loss on the Sale of Defective Units 12,240


Option 2: Processing further the defective units.

Sales for defective units (340*93) 31,620
Cost of Defective Units (340*59) -20,060
Additional Cost (340*41) -13,940
Loss on the Sale of Defective Units 2,380


Loss on the Sale of Defective Units 12,240
Loss on the Sale of Defective Units 2,380
Increase in Net Income 9,860


Based on the computation, processing further will be beneficial for the company for it only result is a 2,380 net loss as compared to the 12,240 net loss when sold as it is. In effect, operating income will increase by 9,860 if units are processed further.


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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