Varto Company has 11,800 units of its sole product in inventory that it produced last year at a cost of $23 each. This year’s model is superior to last year’s, and the 11,800 units cannot be sold at last year’s regular selling price of $35 each. Varto has two alternatives for these items:

Varto Company has 11,800 units of its sole product in inventory that it produced last year at a cost of $23 each. This year’s model is superior to last year’s, and the 11,800 units cannot be sold at last year’s regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each, or (2) they can be reworked at a cost of $277,900 and then sold for $31 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.


Explanation
Revenue if processed further (11,800 × $31) = $365,800
Revenue if sold as is (11,800 × $8) = $94,400
 
Recommendation: Varto should not process these units further, as they will be $6,500 worse off if they do so. (Note that the $23 per unit manufacturing cost is not relevant because it is a sunk cost.)

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