The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a 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) Remachine and $5,000.
B) Remachine and $25,000.
C) Scrap and $1,000.
D) Scrap and $21,000.

Question

Quizplus · Accepted Answer

The relevant costs for each alternative are as follows:

Remachine and sell:

- Cost of remachining: $5,000 
- Revenue from selling remachined lanterns: $9,000 x 1,000 = $9,000,000 
- Total relevant cost: $5,000

Sell for scrap:

- Revenue from selling for scrap: $1,000 x 1,000 = $1,000,000 
- Total relevant cost: $20,000

As can be seen, the total relevant cost for the remachine option is lower than the sell for scrap option. Therefore, it is more desirable to remachine the lanterns and sell them for a higher price. The total relevant cost for this option is $5,000.

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