Differential analysis.

Made Easy, Inc., manufactures household products such as windows, light fixtures,
ladders, and work tables. During the year it produced 10,000 Model 10X windows but
only sold 5,000 units at $40 each. The remaining units cannot be sold through normal
channels. Cost for inventory purposes on December 31 included the following data on
the unsold units:

Materials………………………………………………………………….
$10.00
Labor…………………………………………………………………
…….. 5.00
Variable overhead……………………………………………………. 3.00
Fixed overhead…………………………………………………………. 2.00
&nb sp; -------------
Total cost per window $20.00
& nbsp; =========
Made Easy can sell the 5,000 windows at a liquidation price of $20.00 per window,
but it will incur a packaging and shipping charge of $6.00 per window.

Required:-
1. Identify the relevant costs and revenue for the liquidation sale alternative. Is Made
Easy better off accepting the liquidation price rather than doing nothing?
2. Assume the Model 10X can be reprocessed to another size window, Model 20X,
which will require the same amount of labor and overhead as was initially required to
produce Model 10X but sells only for $30. Determine the most profitable course of
action: liquidate or reprocess

1. Liquidation sale (5,000 units  $20) = $ 100,000

Less: Cost to package and ship
(5,000 units  $6) 30,000
Contribution margin from sale $ 70,000

Yes, the liquidation sale will result in an extra $70,000 in contribution margin.

2.
Alternative 1—Liquidate:
Additional contribution margin........ = $ 70,000

Alternative 2—Reprocess:
Sell at $30  5,000 = $ 150,000
Less variable cost to reprocess:
5,000  $8 = 40,000
Additional contribution margin
from reprocessing 110,000
Alternative 2 will result in $40,000 more contribution margin. $ 40,000

Therefore, the reprocess alternative is more profitable