Question

Answer the following questions. A company has an inventory of 1,050 assorted parts for a line of missiles that has been discontinued. The inventory cost is S74,000. The parts can be either (a) remachined at total additional costs of $26,000 and then sold for $32,000 or (b) sold as scrap for $8,500. Which action is more profitable? Show your calculations. A truck, costing S100,000 and uninsured, is wrecked its first day in use. It can be either (a) disposed of for $15,000 cash and replaced with a similar truck costing $103,500 or (b) rebuilt for $85,000 operating characteristics and looks are concemed. Which action is less cosly? Show your calculations 1 2 Ithus be brand-new as far as 1. A company has an inventory of 1,050 assorted parts for a line of missiles that has been discontinued. The inventtory cost is S74,000. The parts can be either (a) remachined at total additional costs of $26,000 and then sold for $32,000 or (b) sold as scrap for $6,500. Which action is more profitable? Show your calculations. (Only complete the necessary answer boxes.) (a) (b) Remachine Scrap Deduct: Operating income is more profitable. Action 2. A truck, costing S100,000 and uninsured, is wrecked its first day in use. It can be either (a) disposed of for S15,000 cash and replaced with a similar truck costing S103,500 or (b) rebuit for $85,000 and thus be brand-new as far as operating characteristics and looks are concemed. Which action is less costly? Show your calculations. (Only complete the necessary answer boxes.) (a) (b) Rebuild Replace Deduct: Toal relevant costs is less costly Action Choose from any list or enter any number in the input fields and then continue to the next quastion.

Answer 1

Answer 1)

Statement of comparative cost benefit

Particulars	(a)	(b)
	Re-machine	Scrap
Sales value after Re-machining	$ 32,000	-
Sell as Scrap	-	$ 8,500
Total Revenue	$ 32,000	$ 8,500
Less: Additional cost of Re-machining	$ 26,000	-
Net Operating Income	$ 6,000	$ 8,500

Conclusion: The inventory of assorted parts should be sold as scrap as it brings higher net operating income of $ 8,500 (i.e. it is more profitable) as against net operating income of $ 6,000 if it is sold after re-machining.

Notes: Since the line of missiles using assorted parts has been discontinued, the inventory of assorted parts has become obsolete. Therefore, inventory cost of $ 74,000 is a sunk cost and should be ignored while deciding upon all future courses of action.    

Answer 2)

Statement of Relevant Cost

Particulars	(a)	(b)
	Replace	Rebuilt
COSTS TO BE INCURRED
Cost of replacement	$ 1,03,500	-
Cost to rebuilt	-	$ 85,000
Total Cost	$ 1,03,500	$ 85,000
BENEFIT TO BE ACHIEVED
Less: income from disposal	$ 15,000	-
Relevant cost	$ 88,500	$ 85,000

Conclusion: The existing truck should be rebuilt as the relevant to rebuilt (i.e. $ 85,000) is less than the relevant cost of replacement of truck (i.e. $ 88,500).

Notes: Existing cost of truck (i.e. $ 100,000) should be considered as sunk cost being past cost (Historical cost) and should be ignored while choosing future course of action.