Varto Company has 13,000 units of its sole product in inventory that it produced
ID: 1212050 • Letter: V
Question
Varto Company has 13,000 units of its sole product in inventory that it produced last year at a cost of $29 each. This year’s model is superior to last year’s and the 13,000 units cannot be sold at last year’s regular selling price of $44 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $11 each, or (2) they can be reworked at a cost of $241,200 and then sold for $29 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further
Revenue if sold as is
Incremental revenue Incremental net income(Loss)
The company should:
Explanation / Answer
sold to a wholesaler for $11. Revenue is 11 x 13000 or $143,000
cost of goods sold is 29 x 13000 or $377,000.
varto would incur a loss of $234,000 or $18 per unit.
reworked for $241,200 adds another $18.55 (241,200 / 13000) to the cost of goods sold per unit (29+ 18.55 = $47.55 cost per unit), so your total COGS is $618,200 (13000 * 47.55)
revenue at $29 sale price per unit is $377,000 (13000 * 29)
varto would incur a loss of $241,200 or $14.86 per unit.
varto can reduce its loss by $7,200 by selling the inventory to the wholesaler.
Varto Company should not rework the products.There would be a $7,200lose if they do
Revenue if reworked further (13000 * 29)=$377,000
Revenue is sold as is 11 x 13000 or $143,000
Incremental revenue=234000
Less incremental cost of reworking =241200
Incremental net income=-7200 or (7200)
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