Relevant Information for Decision Making
(Relevant costs; sunk costs) Prior to the 2009 Super Bowl, a Phoenix area retailer ordered 50,000 T-shirts that read: Arizona Cardinals-2009 Super Bowl Champs. The company paid $11.75 for each of the custom T-shirts. Following the loss of Arizona to the Pittsburg Steelers, the retailer found itself with 15,000 unsold T-shirts after the Super Bowl. Before the Super Bowl, the retailer was able to sell 35,000 of the T-shirts at an average per-unit price of $25. The company is currently deciding how to dispose of the 15,000 remaining T-shirts. The retailer has learned from one of its suppliers that each shirt could be reworked at an average cost of $5.50 per shirt (which involves removing the Super Bowl reference from the shirts). Management of the retailer believes the reworked shirts could be sold at an average price of $10.25 during the coming football season. Alternatively, the company could sell the shirts at an average price of $2.60 as scrap material.
a. Identify at least three alternatives courses of action management could take with regard to the leftover T-shirts.
b. Which costs are sunk in this decision?
c. Show the relevant costs of each alternative you listed in part (a).
d. Based on your answer to part, what is the best alternative and what is the relative financial advantage of the best alternative over the second-best alternative?