Question

Varto Company has 9,000 units of its sole product in inventory that it produced last year at a cost of $26 each. This year's model is superior to last year's and the 9,000 units cannot be sold at last year's regular selling price of $52 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $14 each, or (2) they can be processed further at a cost of $186,000 and then sold for $34 each. Prepare an analysis to determine whether Varto should sell the products as is or process them further and then sell them. INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING Revenue if processed further Revenue if sold as is Incremental revenue Incremental net income(Loss) The company should:

Answer 1

INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING Answer 1 Revenue if Processed further (9,000 units x $34) Revenue if sold as is (9,000 units x $14) $306,000 $126,000 $180,000 Incremental Revenue Less: Incremental Cost of Processing Incremental net income/(loss) $186,000 ($6,000) Sell as is The Company should The company should elect to sell the products as is and not processed them. Incremental Incremental Incremental 2 Amount per Fixed Income from New Business Costs Unit Sales (850 bikes x $370) Variable Cost (850 bikes x $175) Contribution Margin Fixed Costs Incremental income (loss) from new business $370 $314,500 $148,750 $165,750 $54,000 $111,750 $175 $195 $54,000 The company should Accept the Order