Question

Federar Corporation sells miniature cars made of aluminium. It has 10,000 cars in inventory (that cost $5.00 per unit to produce) that are not suitable to sell because of quality problems. Federar has three options: (1) Write off the inventory as obsolete and dispose them safely at a cost $0.30 per unit. (2) Re-work all the cars at a cost of $3 per car and sell them to outlet stores at a unit price of $3.30. (3) Sell the cars to a scrap dealer for $0.20 per unit (4) Melt the cars and use the aluminium content in current production that can save raw material cost of $1,200 in next month's production. Select all statements, from among the five statements given below, that are true.

	A.	Option 2 is the only option whose value exceeds its opportunity cost
	B.	Option 1's value and opportunity cost are the same
	C.	Opportunity cost of option 4 is $1,200
	D.	Opportunity cost of option 3 is $1,200
	E.	Opportunity cost of option 2 is $2,000

Answer 1

Solution:
	CALACULTION OF GAIN OR LOSS ON ALL OPTIONS
		Option 1	Option 2	Option 3	Option 4
	Revenue Generated or Cost Saving (A)	$                      -	$                   33,000	$                   2,000	$                   1,200
			($ 3.30 X 10,000)	(10,000 X $ 0.20)
	Cost of Rework / Dispose off
	Dispose Off Cost (10,000 X $ 0.3)	$               3,000	$                             -	$                          -	$                          -
	Rework Cost (10,000 X $ 3.0)		$                   30,000
	Total Relevant Cost (B)	$               3,000	$                   30,000	$                          -	$                          -
	Net Revenue (A-B)	$              -3,000	$                      3,000	$                   2,000	$                   1,200
	Option 1 is useless because in this option there is loss of $ - 3,000
	Opportunity Cost of Option 3 is $ 2,000
	Opportunity Cost of Option 4 is $ 1,200
Answer =	Correct optios are as below,
A.	Option 2 is the only option whose value exceeds its opportunity cost
C.	Opportunity cost of option 4 is $1,200