Essay:Madison Ironworks made 500 defective units last month. Fortunately, the un

Question

Essay:Madison Ironworks made 500 defective units last month. Fortunately, the units were identified as defective before they were sold to customers. They are currently included in Madison’s ending inventory balance at $200 each. At the end of the quarter, the company will have to write off their $100,000 cost, since the units have no value in their present condition. The production manager has determined that the units could be reworked for $10 each and then sold for $100. He has also received a bid from a liquidation company to purchase the defective units for $80 each. What alternatives are available to Madison? What information is irrelevant to the decision? Which alternative would generate the best financial result?

Explanation / Answer

What alternatives are available to Madison?

Alternative 1 : Rework and sale it at $ 100

Alternative 2 : Sold as deffective Unit at $ 80

What information is irrelevant to the decision?

Cost of Manufacturing per unit is irrelevant to the decision

Which alternative would generate the best financial result?

Alternative 1 would generate , Net Incremental Cash Flow = (100-10)*500 = 45000

Alternative 2 would generate , cash Flow = 80*500 = $ 40000

Decision : Alternative 1 i.e Rework & sale it would generate the best financial result

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