Question

The lantern corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000. if the lanterns are re-machined for $5,000, they could be sold for $9,000. alternatively, the lanterns could be sold for scrap for $1,000. which alternative is more desirable, and what are the total relevant costs for that alternative?

a. re-machine and $5,000.
b. re-machine and $25,000.
c. scrap and $20,000.
d. scrap and $19,000.

Answer 1

The desirable alternative for the Lantern Corporation is to sell the lanterns for scrap which leads to a sunk cost of $19,000 after accounting for the scrap revenue. This results in a smaller net loss compared to re-machining and trying to sell the lanterns.

Step-by-step explanation:

The scenario involves the Lantern Corporation needing to decide between re-machining obsolete lanterns or selling them for scrap. To determine which alternative is more desirable, we compare the potential revenue with the relevant costs for each alternative.

If the company decides to re-machine the lanterns, it costs an additional $5,000 on top of the $20,000 already incurred, making the total relevant cost $25,000 ($20,000 + $5,000). The lanterns could then be sold for $9,000, resulting in a net loss. On the other hand, selling the lanterns for scrap yields $1,000, with no additional costs since the $20,000 is a sunk cost and therefore not relevant to the decision-making process. Comparing the net loss in both scenarios, the better alternative is to sell the lanterns for scrap, and the relevant costs associated with this decision are the potential revenue from the scrap sale, which is $1,000.

The correct answer is D. scrap and $19,000. This option represents the sunk cost of the inventory ($20,000), less the scrap revenue of $1,000.