Louie Optics manufactures a underwater digital camera. The company's newest model is very popular, but it has an inventory of 5,000 old models for which there is little demand. The company is considering the following options for disposing of these old models:
1. Sell them to a discount mail-order company at a total price of $1,900,000. The mail-order firm would then sell these old models at a unit price of $480.
2. Convert them to new models at a remanufacturing cost of $600 per unit. These new models then could be sold to camera stores for $1,000 each.
The old models had been manufactured at a cost of $525 per unit. The cost of manufacturing new models, however, normally amounts to $700 per unit.
Instructions
a. Perform an incremental analysis of the revenue, costs, and profit resulting from converting the old models to new models as compared with selling them to the mail-order firm.
b. Identify any sunk costs, out-of-pocket costs, and possible opportunity costs.
c. Indicate which of these options you would select and explain your reasoning, assuming that Louie Optics currently:
1. Has substantial excess capacity.
2. Is operating at full capacity manufacturing new models.