Question

13. Hardline Flooring produced 2,500 yards of its economy-grade carpet. In the coloring process, there was a pigment defect and the resulting color appeared to be faded. The carpet normally sells for $15 per yard, with $8 of variable cost per yard and $4 of fixed cost per yard assigned to the carpet. The company realizes that it cannot sell the carpet for $15 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the process is $3 per yard. Reliable Home Solutions is willing to buy the carpet in its current faded condition for $10 per yard. Should Hardline repeat the coloring process or sell the carpet to Reliable Home Solutions and what is the benefit? Repeat coloring for $5,000 benefit. B) Sell as is to Reliable for $17,500 benefit. C) Repeat coloring for $30,000 benefit. D) Sell as is to Reliable for $5,000 benefit.

Answer 1

Recoloring profit = Selling price - recoloring cost

= $15 - $ 3= $12

Yield if it sells to Reliable home solutions = $10

Incremental yield = $12 -$10 = $2

Benefit due to recoloring = $2 * 2500 = $5000

Option A, repeat coloring for $5000 benefit.