Use the following to answer questions 5-6: TXU Company\'s market for the Model 5

Question

Use the following to answer questions 5-6: TXU Company's market for the Model 55 has changed significantly, and TXU has had to drop the price per unit from $285 to $200. There are some units in the work in process inventory that have costs of $280 per unit associated with them. TXU could sell these units in their current state for $160 each. It will cost TXU $35 per unit to complete these units so that they can be sold for $200 each.

5. A new employee looks at the analysis and exclaims, “We'll lose money with either of these alternatives! Let's just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee wants) have on net income? A) Net income will increase by $35 per unit for each unit discarded. B) Net income will decrease by $115 per unit for each unit discarded. C) Net income will decrease by $165 per unit for each unit discarded. D) It will have no effect on net income.

6. When the incremental revenues and expenses are analyzed, the company is better off by A) $5 per unit if they complete the units. B) $15 per unit if they sell the units in their current state. C) $25 per unit if they sell the units in their current state. D) $35 per unit if they complete the units.

Explanation / Answer

5. In case the units are sold in their current state, the revenue generated is $ 160 per unit Costs associated with the units $ 280 Further costs associated before trashing $ 35 Total Costs $ 315 In case the units are sold after trashing, the net income will decrease by $ 115 ($ 200 - $ 315) for each unit discarded. 6. If the incremental revenues and expenses are analysed, the Company is better off by $ 5 per unit if they complete the units. ($ 200 price on discarding - $ 160 as-is-where-is - $ 35 additional costs).

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