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SELL OR PROCESS FURTHER Jeffers Inc. has decided to discontinue its Basic model DVD player. They...

SELL OR PROCESS FURTHER

Jeffers Inc. has decided to discontinue its Basic model DVD player. They currently have a number of partially completed units on hand that have incurred $50 of costs per unit. They could complete them incurring the following additional unit costs:

Direct materials                                         $10

Direct labor                                                $20

Variable overhead                                    $ 5

Fixed overhead                                         $30

The fixed costs relate to depreciation on plant assets.

If Jeffers completes the DVD players they can be sold at $100 per unit. However, another company is willing to buy the DVD players as is for $60.

REQUIRED:

  1. What should Jeffers do?
  1. By how much is this preferable to the next best alternative?
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Answer #1

The relevant costs per unit are the direct materials + Direct labor + Variable overhead.

Relevant costs to complete = $10 + $20 + $5 = $35

Contribution margin earned from completed units = Selling price per unit - Relevant costs to complete

= $100 - $35

= $65

Price offered of $60 per unit is less than the contribution margin per unit earned by $5 ($65 - $60)

What should Jeffers do?

Complete the DVD players.

By how much is this preferable to the next best alternative?

Increases the profit by $5 per unit.

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