Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 320 defective fans in inventory, which cost $58 each to manufacture. These defective units can be sold as is for $21 each, or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stooge Enterprises would be better off by a
A)$23,040 net increase in operating income if the ceiling fans are repaired.
B)$10,240 net increase in operating income if the ceiling fans are sold as is.
C)$10,240 net increase in operating income if the ceiling fans are repaired.
D)$23,040 net increase in operating income if the ceiling fans are sold as is.

Question

Quizplus · Accepted Answer

To determine the best choice, we need to compare the net increase in operating income for each option.

Option 1: Sell defective fans as is for $21 each.

Revenue from selling 320 fans at $21 each = 320 x $21 = $6,720
Cost of manufacturing 320 fans at $58 each = 320 x $58 = $18,560

Net loss = Revenue - Cost = $6,720 - $18,560 = -$11,840

Option 2: Process defective fans for $40 each and sell for the normal selling price of $93 each.

Revenue from selling 320 fans at $93 each = 320 x $93 = $29,760
Cost of manufacturing 320 fans at $58 each = 320 x $58 = $18,560
Cost of processing 320 fans at $40 each = 320 x $40 = $12,800

Net income = Revenue - Cost of manufacturing - Cost of processing = $29,760 - $18,560 - $12,800 = -$1,600

Option 3: Don't sell defective fans at all.

Net loss = Cost of manufacturing 320 fans at $58 each = 320 x $58 = $18,560

Based on these calculations, option 2 (processing the defective fans and selling them for the normal selling price) results in the least net loss, making it the best choice. Therefore, the answer is C.

Stooge Enterprises Manufactures Ceiling Fans That Normally Sell for $93