Varto Company has 7,000 units of its sole product in inventory that it produced

Question

Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of $22 each. This year's model is superior to last year's and the 7,000 units cannot be sold at last year's regular sell- ing price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each, or (2) they can be reworked at a cost of $125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Explanation / Answer

reworked for $125,000 adds another $17.86 (125,000 / 7000)

Therefore cost of goods sold per unit (22 + 17.86 = $39.86 cost per unit),

so the total COGS is $279,000 (7000 * 39.86)

revenue at $25 sale price per unit is $175,000 (7000 * 25)

varto would incur a loss of $104,000 or $14.86 per unit.

Varto can reduce its loss by $6,020 by selling the inventory to the wholesaler.

sold to a wholesaler for $8 ($8*7000) =$56,000 cost of goods sold ($22 * 7000) =$154,000. Varto would incur a loss of $98,000 or $14 per unit.

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