The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at ? manufacturing cost of $20,000. If the lanterns are remachined for $5,000, they could be sold for $9,000. Alternatively, the lanterns could be sold for scrap for $1,000. Which alternative is more desirable and what are the total relevant costs for that alternative?
A)Scrap and $1, 000.
B)Remachine and $25,000.
C)Scrap and $21, 000.
D)Remachine and $5,000.

Question

Quizplus · Accepted Answer

To determine the most desirable alternative, we need to calculate the relevant costs for each option:

Option 1: Sell for scrap
- Revenue from scrapping = $1,000
- Relevant cost = $20,000 (manufacturing cost)

Total relevant cost = $20,000 - $1,000 = $19,000

Option 2: Remachine and sell
- Revenue from selling remachined lanterns = $9,000 x 1,000 = $9,000,000
- Cost of remachining = $5,000
- Relevant cost = $20,000 (manufacturing cost) + $5,000 (remachining cost)

Total relevant cost = $25,000

Comparing the total relevant costs, option 1 (sell for scrap) has a total relevant cost of $19,000, while option 2 (remachine and sell) has a total relevant cost of $25,000. Therefore, the best choice is option D (remachine and sell), as it provides a higher revenue and profit compared to scrapping the obsolete lanterns.

The Lantern Corporation Has 1,000 Obsolete Lanterns That Are Carried