Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $100,000, the company's decision should be to sell the motors at the offered price.
The $450,000 production costs are sunk costs and therefore irrelevant to the decision. The relevant costs are the repair costs of $150,000 compared to the offer to purchase for $100,000. Since the offer is less than the repair costs, the decision should be not to sell the motors at the offered price.

Question

Quizplus · Accepted Answer

The statement is incorrect. The relevant costs are not only the repair costs but also the salvage value of the defective motors. If the $100,000 offer is higher than the salvage value, then the company should sell the motors at the offered price rather than incurring the repair costs. However, without information on the salvage value, we cannot make a definitive decision.

Assuming That the MR Corporation Has an Inventory of 200