Question
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
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
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