Question

Luz Company has 3,000 light fixtures that were allocated a joint cost of $30,000 and are now obsolete. If the fixtures are reworked for $10,000, they could be sold for $18,000. Alternatively, the light fixtures could be sold for $13,000 to a jobber located in a distant city. If it would cost $5,000 to store the fixtures until the jobber takes them, what is the preferred alternative?

Answer 1

management is indifferent between selling to the jobber and reworking the fixture

Explanation:

Firstly, joint cost is sunk cost as it has already been incurred.

Now, the management has to options that is rework or sell to job worker. We have to calculate net benefit for both options.

Net Benefit if company reworks and sells

= benefit- rework cost

= $ 18000 - $ 10000

= $ 8000

Net Benefit if company sell to job worker

= sale price to job worker - storage cost

= $ 13000 - $ 5000

= $ 8000