Question

Micron Manufacturing produces electronic equipment. This year, it produced 7,500 oscilloscopes at a

manufacturing cost of \(300 each. These oscilloscopes were damaged in the warehouse during storage and,

while usable, cannot be sold at their regular selling price of \)500 each. Management has investigated the

matter and has identified three alternatives for these oscilloscopes.

1. They can be sold to a wholesaler for \(75 each.

2. They can be disassembled at a cost of \)400,000 and the parts sold to a recycler for \(130 each.

3. They can be reworked and turned into good units. The cost of reworking the units will be \)3,200,000,

after which the units can be sold at their regular price of $500 each.

Required

Which alternative should management pursue? Show analysis for each alternative.

Short answer

The company should select the second alternative because the net loss of the third alternative is less than all alternatives.

Step-by-step solution

Definition of net loss

The net loss is the amount when the cost and expenses of the product is greater than sales revenue.

Amount of net loss of alternative 1

$\begin{array}{rcl}\mathbf{Loss} \mathbf{to} \mathbf{Company}& \mathbf{=}& \mathbf{Quantity} \mathbf{Produced}\mathbf{\times }\mathbf{Manufacturing} \mathbf{Cost}\\ & \mathbf{=}& \mathbf{7}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{300}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{250}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss} & \mathbf{=}& \mathbf{Total} \mathbf{Loss}\mathbf{-} \mathbf{Amount} \mathbf{Received} \mathbf{from} \mathbf{Sale}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{250}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{562}\mathbf{,}\mathbf{500}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{687}\mathbf{,}\mathbf{500}\\ & & \end{array}$

Amount of net loss of alternative 2

$\begin{array}{rcl}\mathbf{Amount} \mathbf{Recovered}& \mathbf{=}& \mathbf{Amount} \mathbf{Received}\mathbf{-} \mathbf{Cost} \mathbf{of} \mathbf{diassembled}\\ & \mathbf{=}& \mathbf{\$}\mathbf{975}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{400}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{575}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss}& \mathbf{=}& \mathbf{Cost} \mathbf{of} \mathbf{Manufacturing}\mathbf{-} \mathbf{Amount} \mathbf{Recovered}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{250}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{575}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{675}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Amount of net loss of alternative 3

$\begin{array}{rcl}\mathbf{Amount} \mathbf{Recovered}& \mathbf{=}& \mathbf{Amount} \mathbf{Received} \mathbf{from} \mathbf{Sale}\mathbf{-} \mathbf{Cost} \mathbf{of} \mathbf{rework}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{750}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{200}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{550}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss}& \mathbf{=}& \mathbf{Cost} \mathbf{of} \mathbf{Manufacturing}\mathbf{-} \mathbf{Amount} \mathbf{Receoverd}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{250}\mathbf{,}\mathbf{000}\mathbf{-} \mathbf{\$}\mathbf{550}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{,}\mathbf{000}\\ & & \end{array}$