Question

Garcia Company has 10,000 units of its product that were produced last year at a total cost of \(150,000. The units were damaged in a rainstorm because the warehouse where they were stored developed a leak in the roof. Garcia can sell the units as is for \)2 each or it can repair the units at a total cost of \(18,000 and then sell them for \)5 each. Should Garcia sell the units as is or repair them and then sell them? Explain.

Short answer

The company should sell the units after repairing them because the incremental income is more than the incremental value of the units before repairs.

Step-by-step solution

Definition of Incremental Cost

These are the additional costs incurred if a company is taken particular action like making changes in the products.

Calculation of incremental income

	Sell product as it is	Sell after repairs
Incremental Revenue	$20,000	$50,000
Incremental cost	-	(18,000)
Incremental Income	$20,000	$32,000

$\begin{array}{rcl}\mathrm{Incremental}\mathrm{Revenue}\mathrm{of}\mathrm{sales}\mathrm{after}\mathrm{repairs}& =& \mathrm{No}.\mathrm{of}\mathrm{units}\mathrm{available}\times \mathrm{Selling}\mathrm{price}\mathrm{per}\mathrm{unit}\\ & =& 10,000\times \$5\\ & =& \$50,000\end{array}$