Question

Armstrong Corporation manufactures bicycle parts. The company currently has a $19,300 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7,100, or modified for $9,900 and sold for $21,300.

1A) Identify the relevance of the data given in the exercise to the decision about what to do with the obsolete parts (Irrelevant data or Relevant data).

	Current sales value for unmodified parts Sales value for modified parts Modification costs Current book value of inventory

1B) Calculate the benefit under each alternative for disposing of the obsolete parts.

	Benefit if parts are sold without modification Net benefit if parts are sold after being modified

1C) How should the obsolete parts be disposed?

	How should the obsolete parts be disposed?

Answer 1

Answer 1A) Decision regarding relevance or irrelevance of data

	Decision
Current sales value for unmodified parts	Relevant
Sales value for modified parts	Relevant
Modification costs	Relevant
Current book value of inventory	Irrelevant

Answer 1B) Calculate the benefit under each alternative for disposing of the obsolete parts.

Benefit if parts are sold without modification	$          7,100
Net benefit if parts are sold after being modified = $21300-$9900	$        11,400

Answer 1C) How should the obsolete parts be disposed?

How should the obsolete parts be disposed?	It should be sold after modification

Parts should be sold after modification as it will generate extra benefit as without modification net benefit is $7100 and after modification net benefit is $11400

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