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Multiple choice

Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50,000. If the lamps are reworked for $20,000, they could be sold for $35,000. Alternatively, the lamps could be sold for $8,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:

A. $8,000
B. $15,000
C. $20,000
D. $50,000

Rice Corporation currently operates two divisions which had operating results last year as follows

West Troy
Division Division
Sales $600,000 $300,000
Variable costs 310,000 200,000
Contribution margin 290,000 100,000
Traceable fixed costs 110,000 70,000
Allocated common corporate
costs 90,000 45,000
Net operating income (loss)$ 90,000 ($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division. Troy Division's traceable fixed costs could be avoided if the division were eliminated. The total common corporate costs would be unaffected by the decision. If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been:

A. $15,000 higher
B. $30,000 lower
C. $45,000 lower
D. $60,000 higher

Solution Preview

1. Option D is correct since $50,000 of manufacturing costs were incurred earlier and so are sunk ...

Solution Summary

The solution explains two questions relating to sunk costs and elimination of a division