Question

g Benton, Inc. has decided to discontinue manufacturing its Quantum model personal organizer. Currently the company has a number of partially completed personal organizers on hand. The company has spent $111 per unit to manufacture these organizers. To complete each unit, costs of $14 for material and $15 for direct labor will be incurred. In addition, $9 of variable overhead and $34 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be added per unit. If Benton, Inc., completes the organizers, it can sell them for $124 per unit. Another manufacturer is interested in purchasing the partially completed organizers for $107 per unit and converting them into inventory tracking devices. Determine whether Benton should complete the personal organizers or sell them in their current state.

Answer 1

Sell them in their current state

Step-by-step explanation:

Ignore the cost already incurred ($111) since it is a sunk cost (already spent) and should not affect future decision.

1) The incremental cost of completing each unit = material cost ($14) + direct labour cost ($15) + variable overhead cost ($9) = $38 (allocated fixed cost was not included since it is a non-cash item)

With a sale price of $124, the profit per unit = $124 - $38 = $89.

2) Whereas, selling the partially completed unit will earn $107 (without any additional cost).

Since selling the partially completed unit earns higher incremental value than completing manufacture before sale, selling is the optimal decision.