A. The manufacturing cost of $6.00 is a sunk cost and not relevant to the decision. The net revenue from reworking the obsolete toys is $7,000 [($3.00 - $2.00) × 7,000)]. Revenue if the toys are scrapped is $12,950 ($1.85 × 7,000). The dollar advantage for selling as scrap is $5,950 ($12,950 - $7,000).This could also be solved by multiplying the per unit difference by 7,000. The net advantage to reworking and selling the inventory is $1 per unit ($3 sales price minus $2 rework cost). The net advantage to sellilng the inventory for scrap is $1.85 per unit. Selling the inventory for scrap will net the company $.85 per unit more than reworking it to sell. $.85 × 7,000 = $5,950.
B. This is the rework cost ($2) plus the sale price of the reworked units ($3) plus the revenue from selling them for scrap ($1.85) multiplied by 7,000. That is not the total dollar amount of the advantage of one of the alternatives.
C. This answer results from subtracting $1.85 from $3.00 and multiplying the difference by 7,000. This ignores the cost of the rework.
D. This is the present inventory cost of $6 plus the net realizable value of $1 minus the scrap revenue of $1.85, the quantity multiplied by 7,000. That is not the total dollar amount of the advantage of one of the alternatives.
