TSP Company's market for the Model 55 has changed significantly, and TSP has had to drop the price per unit from $285 to $200. There are some units in the work in process inventory that have costs of $280 per unit associated with them. TSP could sell these units in their current state for $160 each. It will cost TSP $35 per unit to complete these units so that they can be sold for $200 each.
1. A new employee looks at the analysis and exclaims, “We'll lose money with either of these alternatives! Let's just throw these units in the trash!” Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee wants) have on net income?
A) Net income will increase by $35 per unit for each unit discarded.
B) Net income will decrease by $115 per unit for each unit discarded.
C) It will have no effect on net income.
D) Net income will decrease by $165 per unit for each unit discarded.
2. When the incremental revenues and expenses are analyzed, the company is better off by
A) $5 per unit if they complete the units.
B) $15 per unit if they sell the units in their current state.
C) $25 per unit if they sell the units in their current state.
D) $35 per unit if they complete the units.