Chapter 10, Problem 2MC

Denali Company manufactures household products such as windows, light fixtures, ladders, and work tables. During the year it produced 10,000 Model 10X windows but only sold 5,000 units at $40 each. The remaining units cannot be sold through normal channels. Cost for inventory purposes on December 31 included the following data on the unsold units:

Denali can sell the 5,000 windows at a liquidation price of $20.00 per window, but it will incur a packaging and shipping charge of $7.50 per window.

Required:

1. 1. Identify the relevant costs and revenues for the liquidation sale alternative. Is Denali better off accepting the liquidation price rather than doing nothing?
2. 2. Assume that Model 10X can be reprocessed to another size window, Model 20X, which will require the same amount of labor and overhead as was required to initially produce, but sells for only $33. Determine the most profitable course of action—liquidate or reprocess.