Varto Company has 11,200 units of its product in inventory that it produced last year at a cost of $158,000. This year’s model is better than last year’s, and the 11,200 units cannot be sold at last year’s normal selling price of $55 each. Varto has two alternatives for these units: (1) They can be sold as is to a wholesaler for $123,200 or (2) they can be processed further at an additional cost of $186,800 and then sold for $302,400.

Question

(a) Prepare a sell as is or process further analysis of income effects.
(b) Should Varto sell the products as is or process further and then sell them?

Answer 1

(a) To prepare a sell as is or process further analysis, we need to compare the income effects of each alternative.

Sell as is:
Revenue from wholesaler = $123,200
Cost of production = $158,000
Income from selling as is = Revenue - Cost = $123,200 - $158,000 = -$34,800 (Loss)

Process further:
Additional cost of processing = $186,800
Revenue from selling processed units = $302,400
Total cost of production = Cost of production + Additional cost of processing = $158,000 + $186,800 = $344,800
Income from selling processed units = Revenue - Total cost of production = $302,400 - $344,800 = -$42,400 (Loss)

(b) Based on the sell as is or process further analysis, Varto would incur a loss in both alternatives. However, the loss is smaller if the products are sold as is (-$34,800) compared to processing further (-$42,400).

Therefore, Varto should sell the products as is to the wholesaler as it would result in a smaller loss.