Question

Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of \(22 each. This year’s model is superior to last year’s, and the 7,000 units cannot be sold at last year’s regular selling price of \)35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for \(8 each or (2) they can be reworked at a cost of \)125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

Short answer

The company should sell the product to the wholesaler as it is.

Step-by-step solution

Definition of incremental income

The incremental income is the company’s income after choosing various courses of action.

 Step 2: Calculation of incremental income

	Sell as is	Process Further
Sales	$56,000	$175,000
Relevant Costs:
Cost of Process Further		$125,000
Total Relevant Costs		$125,000
Incremental Income	$56,000	$50,000

The incremental income by selling it to a wholesaler is $56,000