Armstrong Corporation manufactures bicycle parts. The company currently has a $1

Question

Armstrong Corporation manufactures bicycle parts. The company currently has a $19,600 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7,100, or modified for $10,100 and sold for $20,500.

[The following information applies to the questions displayed below. Armstrong Corporation manufactures bicycle parts. The company currently has a $19,600 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7100, or modified for $10,100 and sold for $20,500. Required information 5.00 points Required: 1. Identify the relevance of the data given in the exercise to the decision about what to do with the obsolete parts. Current sales value for unmodified parts Sales value for modified parts Modification costs Current book value of inventory

Explanation / Answer

Since, parts have become obsolete, the costs incurred are Sunk Cost, which cannot be recoverd.

(1)

Current sales Value for Unmodified Parts

$7,100

Sales value for Modified Parts

$20,500

Modification Costs

$10,100

Current Book Value of Inventory

$19,600

(2) (a)

Benefit if parts are sold without modification

$7,100

Net Benefit if parts are sold after modification

$10400

$20500-$10100

(2) (b)

Sales value, if sold unmodified = $7,100

Sales value, if modified and sold = $10,400

Hence, its beneficial to Modify and sell.

Current sales Value for Unmodified Parts

$7,100

Sales value for Modified Parts

$20,500

Modification Costs

$10,100

Current Book Value of Inventory

$19,600

(2) (a)

Benefit if parts are sold without modification

$7,100

Net Benefit if parts are sold after modification

$10400

$20500-$10100

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