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 $325,000 before repairing them, 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 $325,000. Since the offer is more than the repair costs, the decision should be to sell the motors at the offered price.

Question

Quizplus · Accepted Answer

The relevant costs for this decision are the repair costs versus the offer to purchase the motors. The sunk cost of $450,000 to produce the defective motors is irrelevant. As the offer to purchase the motors for $325,000 is higher than the repair costs of $150,000, the company should accept the offer and sell the motors. Therefore, the decision should be to sell the motors at the offered price.

Assuming That the MR Corporation Has an Inventory of 200