Varto company has 11800 units of its sole product in inventory that it produced last yrear at a cost of $24 each. this years model is superior to last year's and the 11800 units cannot be sold at last years regular selling price of $55 each. Varto has two alternatives for these items:

Complete question:

Varto Company has 11,800 units of its sole product in inventory that it produced last year at a cost of $24 each. This year’s model is superior to last year’s and the 11,800 units cannot be sold at last year’s regular selling price of $55 each. Varto has two alternatives for these items:

(1) they can be sold to a wholesaler for $9 each, or

(2) they can be reworked at a cost of $220,000 and then sold for $27 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Varto company should not process further, they should sell it as it is.

Explanation:

Given:

For last year:

Product quantity = 11800

Cost = $24 each

For this year, the model is superior to last year's model and they can't be sold for the same price.

Required:

Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Analysis is prepared below:

INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING

Revenue if processed further: (11800*$27)  318600

Revenue if sold as it is: (11800*$9)106200

Incremental revenue: (318600-106200)212400

Further processing cost:220000

Incremental net income: (220000-212400)  7600 (loss)

From the analysis above, Varto company should not process further, as they will make a loss of $7,600 if they process further.

NB: $24 manufacturing cost is sunk cost which makes it not needed.