AZ Company has 400 obsolete widgets that are carried in inventory at a total cost of...

AZ Company has 400 obsolete widgets that are carried in inventory at a total cost of $576,000. If these widgets are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the widgets can be sold in their present condition for $40,000.

Suppose the selling price of the upgraded widgets has not been set. At what selling price per unit would the company be as well off upgrading the widgets as if it just sold the widgets in their present condition?

$308

$350

$110

$50

Expert Solution

Answer : Total Cost of $576000 is a sunk cost which will not be considered for calculating pay-offs by upgrading the widgets or selling them in the present condition

Scenario 1

Particulars	Amount
Sale price post upgradation	$160000
Cost Price for upgradation	$100000
Net profit post upgradation(a)	$60000
Sale as in present condition without upgradation(b)	$40000
Decision a or b, whichever is higher	$60000

*Advisable to sale the widgets post upgradation as profits are higher

Scenario 2

Number of Widgets(a)	400	400	400	400
Selling Price per unit(b)	$308	$350	$110	$50
Estimated selling Price(a*b)	$123200	$140000	$44000	$20000
Cost for Upgradation	$100000	$100000	$100000	$100000
Net Profit	$23200	$100000	-$56000	-$80000

* Either sale the wigets at $350 per unit or sale them in their condition as profit in both the cases are same it is advisabe to sale them in their condition

ekkarill92 answered 1 year ago

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