Toops manufactures TVs. The company's high-definition TVs are very popular, but it has an inventory of 400 large-screen, standard-definition TVs for which there is little demand. Toops is considering the following options for disposing of these TVs:
1. Sell them to a discount mail-order company at a total price of $36,000. The mail-order firm would then sell these large-screen, standard-definition TVs at a unit price of $180.
2. Convert them to high-definition TVs at a remanufacturing cost of $650 per unit. These converted TVs then could be sold to TV stores for $1,200 each.
The standard-definition TVs were manufactured at a cost of $250 per unit. The cost of manufacturing high-definition TVs of the same size, however, normally amounts to $700 per unit.
Instructions
a. Perform an incremental analysis of the revenue, costs, and profit resulting from converting the standard-definition TVs to high definition 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 Toops currently:
1. Has substantial excess capacity.
2. Is operating at full capacity manufacturing high-definition TVs.