This company has 100 obsolete aircraft parts in its inventory.

The original manufacturing cost of these parts was 100,000.

This company can 1) re-machine the parts for $30,000 and then sell them for $50,000

OR

2) sell them as scrap for $5000.

Which should this company do?

This is an unfortunate situation yet the $100,000 past cost is irrelevant to the decision to re-machine or scrap.

The only relevant factors are the expected future revenues and costs:

	Re-Machine - Keep	Scrap - Replace	Differential cost and benefits
Expected future revenue
Expected future costs
Relevant excess of revenue over cost
Accumulated historical inventory cost

Net overall loss on project $ $ $

Particulars: 100 parts original historical cost is aka accumulated historical inventory cost 100000

(Relevant) expected future revenue/sales 50000 Re-machine (Keep)

(Relevant) Re-machine (Keep) for expected future cost 30000

(Relevant) excess of revenue over cost (50000 - 30000) = 20000

(Irrelevant) Accumulated historical inventory cost 100000 (unaffected by decision 20000 - 100000 = (-80000)

Now compute column for Scrap (Replace)

(Relevant) expected future revenue/ sales) 5000; (50000-5000 = 45000 (differential cost and benefits); also place Relevant expected future cost of 30000 in the (difference column)

Next in the relevant excess of revenue over cost place 5000

Next compute (20000 - 5000 = 15000 ( this number goes in difference column below 30000)

Calculate difference column (30000 - 15000 = 15000)

Calculate replace column (5000 - 100000 = (-95000)

Check work:

(30000 - 15000 = 15000)

(95000-80000 = 15000)

Positive number indicates in favor of re-machining

This is a keep or replace problem (differential analysis AKA Relevant information for decision making with a focus on operational decisions. Please show your work