XTZ Company\'s market for the Model 55 has changed significantly, and XTZ has ha
ID: 2634737 • Letter: X
Question
XTZ Company's market for the Model 55 has changed significantly, and XTZ has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. XTZ could sell these units in their current state for $100 each. It will cost XTZ $10 per unit to complete these units so that they can be sold for $125 each.
4.
A new employee looks at the analysis and exclaims,
4.
A new employee looks at the analysis and exclaims,
Explanation / Answer
The problem is concerned with drop in the demand of a product XYZ . Due to this drop now one complete unit will be sold at $125. Vefore market change one units was sold at $265. Thus company is suffering a decrease in net revenue by $265- $125 = $140.
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However company has no finished product at present. Only some work in process stocks are there. Cost incurred on this items till date is $150. They are sealable in its current state at $100. Thus company will suffer loss of $150 - $100 =$50 per unit.
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An alternative way is available. These WIP stocks can be further processed at additional cost of $10 per unit. If they are processed, then each unit can be sold at $125. In that case loss per unit will be -
Revenue - cost = $125 - ($150 +$10) = -$35. Thus loss per unit is coming down from $50 to $35.
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Above analysis clearlly indicates that company will always suffer loss whether units are processed or not. A new employee looking at the analysis has suggested to put the items in trash since loss cannot be avoided under any situation.
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But this decision is not a wise one. If items are put into trash company will loss entire cost of $150 incurred till date. Instead by selling items in its current state company can recover $100. Thus loss will be only $50. If they are processed further then loss will come down to $35. So decision of pushing them into trash is not justifiable. It should be processed further and then will be sold in the market to minimize loss.
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Based on above analysis the answers of the different parts of the problem are as follows-
Answer of point 4. Answer is option B. Decision of trashing will reduce net income of $115 per unit discarded.
Answer of point 5: Answer is option A. When incremental revenue and incremental costs are analyzed, the company is better off by $15 per unit.
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