Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do?
A) Sell the inventory for $20,000 scrap value
B) Dispose of the inventory to avoid any further decline in value
C) Hold the inventory at its $15,000 cost
D) Manufacture further and sell it for $50,000

Question

Quizplus · Accepted Answer

If Pratt manufactures the inventory further at a cost of $15,000, it can sell it for $50,000. This represents a profit of $20,000 ($50,000 - $15,000 - $15,000). Selling the inventory for scrap value or holding it at its current cost would result in a loss of $5,000 ($20,000 - $15,000). Therefore, the best choice is to manufacture further and sell it for $50,000.

Pratt Company Has Old Inventory on Hand That Cost $15,000