Question

Varto Company has 12,600 units of its sole product in inventory that it produced last year at a cost of $31 each. This year’s model is superior to last year’s, and the 12,600 units cannot be sold at last year’s regular selling price of $49 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $13 each or (2) they can be processed further at a cost of $272,300 and then sold for $34 each. Should Varto sell the products as is or process further and then sell them?

Answer 1

Answer:

It is more profitable to sell the units as-is.

Explanation:

Giving the following information:

Number of units= 12,600

Varto has two alternatives for these items:

(1) they can be sold to a wholesaler for $13 each

(2) they can be processed further for $272,300 and then sold for $34 each.

The first cost of $31 is a sunk cost, it will remain no matter which option is chosen. We will not take it into account for the decision making process.

Option 1:

Effect on income= 12,600*13= $163,800

Option 2:

Effect on income= 12,600*34 - 272,300= $156,100

It is more profitable to sell the units as-is.