Question

Armstrong Corporation manufactures bicycle parts. The company currently has a $18,500 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $6,300, or modified for $9,100 and sold for $19,700.
Calculate the benefit under each alternative for disposing of the obsolete parts.

Answer 1

Explanation:

There are two alternatives

1. Sold for $6,300

The inventory parts should be sold for $6,300 as the current inventory parts are not relevant as it is a sunk cost i.e $18,500

2. Repair and after that sale it

Now in this case, we have to determine the benefit generated i.e come from

= Sale value - repairing cost

= $19,700 - $9,100

= $10,600

As we can see that the alternative 2 generated higher benefit as compare to the alternative 1 so it would be more beneficial for the company