Asked by Zachary Summach on Jul 04, 2024
Verified
The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at ? manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative?
A) Scrap and $1, 000.
B) Remachine and $25,000.
C) Scrap and $21, 000.
D) Remachine and $5,000.
Remachine
The process of reworking or refurbishing a piece of machinery to restore its functionality or improve its performance.
Manufacturing Cost
The total expense incurred in the process of producing goods, including direct materials, direct labor, and manufacturing overhead.
Scrap
Material that is discarded or left over from the manufacturing process, often repurposed or recycled, but sometimes considered waste.
- Learn the idea of relevant expenses associated with making decisions.
Verified Answer
Option 1: Sell for scrap
- Revenue from scrapping = $1,000
- Relevant cost = $20,000 (manufacturing cost)
Total relevant cost = $20,000 - $1,000 = $19,000
Option 2: Remachine and sell
- Revenue from selling remachined lanterns = $9,000 x 1,000 = $9,000,000
- Cost of remachining = $5,000
- Relevant cost = $20,000 (manufacturing cost) + $5,000 (remachining cost)
Total relevant cost = $25,000
Comparing the total relevant costs, option 1 (sell for scrap) has a total relevant cost of $19,000, while option 2 (remachine and sell) has a total relevant cost of $25,000. Therefore, the best choice is option D (remachine and sell), as it provides a higher revenue and profit compared to scrapping the obsolete lanterns.
Learning Objectives
- Learn the idea of relevant expenses associated with making decisions.
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