Discussion:
(Relevant costs) Because of a monumental error committed by its purchasing department, John's Super Grocery received 50,000 heads of lettuce rather than the 500 that were actually ordered. The company paid $0.50 per head for the lettuce. Although the management is confident that 1,000 units can be sold through its regular sales, the market is not large enough to absorb the other 49,000 heads. Management has identified two ways to dispose of the excess heads. First, a wholesaler has offered to purchase them for $0.25 each. Second, a restaurant chain has offered to purchase the heads if John's will agree to convert the heads into packaged lettuce salads. This option would require John's to incur additional costs of $11,000 for conversion and the heads could then be sold for $0.48 each.
a. Which costs are sunk in this decision?
b. There are actually three alternatives John's can consider. Describe the alternative that is not mentioned in the story.
c. What are the relevant costs of each decision alternative and what should the company do?