Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.] Armstrong Corporation manufactures bicycle parts. The company currently has a $19,900 inventory of parts that have become obsolete due to changes in design specifications. The parts could be sold for $7,400, or modified for $10,400 and sold for $21,100. 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

In the given case we have to identify, whether the obsolete inventory should be sold off for $ 7400 or be repaired for $ 10400 and sold for $ 21100

The inventory cost of $ 19900 should not be considered for decision making since it is sunk cost.

(Sunk Cost is those expenses which have been incurred in past and cannot be changed. Further they do not have any effect on current decision making)

In option 1 net cash flow will be = 7400

In option 2 net cash flow will be = 21100 – 10400 = 10700

So clearly option 2 should be selected, because it has higher return.

Current sales value of Unmodified inventory

7400

Sales value for modified chair

21100

Modified cost

10400

Current book value of inventory

19900

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Current sales value of Unmodified inventory

7400

Sales value for modified chair

21100

Modified cost

10400

Current book value of inventory

19900

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