Question

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Armstrong Corporation manufactures bicycle parts. The company currently has a $18,900 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $6,700, or modified for $9,500 and sold for $20,500.

Identify the relevance of the data given in the exercise to the decision about what to do with the obsolete parts.

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

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

Answer 1

• All working forms part of the answer
• Requirement 1

Current Sales value for Unmodified parts	$                    6,700.00
Sales value for modified parts	$                 20,500.00
Modification costs	$                    9,500.00
Current Book Value of Inventory	$                 18,900.00

• Requirement 2

Book Value of Inventory is a SUNK cost and will not be considered while calculating Benefits

Benefits if parts are sold without modification	$                    6,700.00
Net benefits if parts are sold after being modified [$20500 – $9500]	$                 11,000.00