Varto Company has 7,000 units of its sole product in inventory that it produced last year at a cost of $22 each. This year’s model is superior to last year’s, and the 7,000 units cannot be sold at last year’s regular selling price of $35 each. Varto has two alternatives for these items: (1) they can be sold to a wholesaler for $8 each or (2) they can be reworked at a cost of $125,000 and then sold for $25 each. Prepare an analysis to determine whether Varto should sell the products as is or rework them and then sell them.

By comprising these two alternatives, we get to know that the product should be sold as it would increase the net income by $6,000 ( 56,000 - 50,000)

Explanation:

There are two conditions which are given in the question:

1. Sold to wholesaler:

In this we have to compute the sale which is shown below:

So,

The sales = sales units × wholesaler selling price

= 7,000 × $8

= 56,000

In this, the reworking cost is zero,

So, the net income would be 56,000

2. Reworked:

In this we have to compute the sales and the reworking cost which are shown below:

So,

The sales = sales units × wholesaler selling price

= 7,000 × $25

= 175,000

And, the reworking cost is = $125,000

So, the net income would be equals to

= Sales - reworking cost

= $175,000 - $125,000

= $50,000

By comprising these two alternatives, we get to know that the product should be sold as it would increase the net income by $6,000 ( 56,000 - 50,000)

The analysis is given in the attachment.