PROBLEM 7-5. Additional Processing Decision and Qualitative Factors Carpets Unlimited produced 1,000 yards of its economy grade carpet. In the coloring process, there was a pigment defect and the resulting color appeared to be faded. The carpet normally sells for $10 per yard: $5 of variable cost per yard and $3 of fixed cost per yard have been assigned to the carpet.

The company realizes that it cannot sell the carpet for $10 per yard, through its normal channels, unless the coloring process is repeated. The incremental cost of the process is $2 per yard. However, United Home Discount Store is willing to buy the carpet in its current faded condition for $7 per yard.

Required

a. Should Carpets Unlimited repeat the coloring process or sell the carpet to United Home Discount Store?

b. Suppose United Home Discount Store is willing to buy the carpet for $9 per yard if Carpets Unlimited's brand is associated with the carpet by means of a tag indicating the carpet was produced by Carpets Unlimited (a highly regarded producer). Would you accept United's offer if you were the president of Carpets Unlimited?