The Lantern Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of $20,000.If the lanterns are re-machined 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) Re-machine and $5,000.
B) Re-machine and $25,000.
C) Scrap and $20,000.
D) Scrap and $19,000.

Question

Quizplus · Accepted Answer

The relevant cost for the re-machining alternative is the cost of re-machining, which is $5,000, and the opportunity cost of the manufacturing cost, which is $20,000. Therefore, the total relevant cost for the re-machining alternative is $25,000. 
The relevant cost for the scrap alternative is the scrap value, which is $1,000. 
Since the selling price of the re-machined lanterns is $9,000, which is higher than the scrap value, and the relevant cost of re-machining is $25,000, which is less than the manufacturing cost of $20,000 plus the scrap value of $1,000, the more desirable alternative is to re-machine the lanterns and sell them for $9,000.
Therefore, the best choice is to re-machine the lanterns and incur the cost of $5,000, which gives a total relevant cost of $25,000.

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