Question

Fire Code manufactures smoke detectors that are sold to homeowners throughout the United States at $20 apiece. Each detector is equipped with a sensory cell that is guaranteed to last two full years before needing to be replaced. The company currently has 80,000 smoke detectors in its inventory, which contain sensory cells that had been purchased from a discount vendor. Fire Code engineers estimate that these sensory cells will last only 18 months before needing to be replaced. The company has incurred the following unit costs related to the 80,000 detectors:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12

Fire Code is currently evaluating three options regarding the 80,000 detectors:
1. Scrap the inferior sensory cell in each unit and replace it with a new one at a cost of $6 each. The units could then be sold at their full unit price of $20.
2. Sell the units with the inferior sensory cells at a discounted unit price of $18. This option would also involve changing the packaging of each unit to inform the buyer that the estimated life of the sensory cell is 18 months. The estimated out-of-pocket cost associated with the packaging changes is $2 per unit.
3. Sell each unit “as is” with its current packaging to a discount buyer in a foreign country. The buyer has offered to pay Fire Code a unit price of $17.

Instructions
a. Perform an incremental analysis of these options. Based on your analysis, which option should Fire Code choose?
b. What nonfinancial concerns should the company take into consideration?



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  • CreatedApril 17, 2014
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