Final answer:
To determine whether Varto Company should sell its inventory as is or process further, an analysis of incremental revenue against incremental costs is conducted. It shows that selling as is would prevent a $7,900 loss that would result from processing further, thus selling as is to a wholesaler for $124,000 is the better financial decision.
Step-by-step explanation:
The question posed by the student involves making a business decision for Varto Company regarding unsold inventory. A sell as is or process further analysis requires evaluating both alternatives to determine which results in higher profitability for the company. Here’s how you can perform this analysis:
- Option 1: Sell as is. The company can sell the units to a wholesaler for $124,000.
- Option 2: Process further. By spending an additional $243,500 on processing, the units could be sold for $359,600.
To compare the options, we need to calculate the incremental revenue and incremental costs associated with processing further. The incremental revenue from processing further is calculated as:
Incremental Revenue = Sales after processing - Sales if sold as is
Incremental Revenue = $359,600 - $124,000
Incremental Revenue = $235,600
Next, we look at the incremental costs, which in this case, is the additional processing cost:
Incremental Cost = Additional processing cost
Incremental Cost = $243,500
Finally, we calculate the incremental profit (or loss) by deducting the incremental cost from the incremental revenue:
Incremental Profit = Incremental Revenue - Incremental Cost
Incremental Profit = $235,600 - $243,500
Incremental Profit = ($7,900)
Since the incremental profit is negative, Varto Company would incur a $7,900 loss by processing further. Therefore, based on these calculations, it would be more financially beneficial for Varto Company to sell the units as is to the wholesaler for $124,000.