Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as is, for a total of $4,000. Compared to just selling the 200 DVD players for a total of $4,000 as they are, what is the net increase (decrease) in operating income if Granger upgrades the DVD players and then sells them?

Question

Quizplus · Accepted Answer

If Granger sells the 200 DVD players as is, they will earn $4,000 but will not incur any additional costs. This would result in operating income of $4,000.

If Granger upgrades the DVD players, they will incur a cost of $15 x 200 = $3,000. Once upgraded, they can sell the DVD players for a total of $40 x 200 = $8,000. The operating income would be $8,000 - $3,000 - ($100 x 200) = $1,000.

Therefore, upgrading the DVD players and selling them would result in a net increase in operating income of $1,000 compared to just selling the DVD players as is. Therefore, the best choice is B.

Granger Company Makes Portable DVD Players