Hickman Manufacturing purchased equipment that cost $15,000 to manufacture luminous sneakers for adults. The product is not selling and the company is losing money on adult light-up sneakers. The equipment could sell for $5,000 if the company discontinues production of luminous sneakers for adults. In addition, the factory is currently full, so if the company ceases production of light-up sneakers for adults, it could produce more trail running shoes, generating an additional $7,000 in revenue. Suppose you are the CEO of Hickman Manufacturing.

1. What kind of cost is the $15,000 cost of equipment?

i. Should this affect your decision to stop producing adult lighted sneakers?

2. What kind of cost is the $5,000 scrap value of the equipment?

i. Should this affect your decision to stop producing adult lighted sneakers?

3. What is the cost of potential additional revenue of $7,000 from trail running sneakers?

i. Should this affect your decision to stop producing adult lighted sneakers?

4. Now suppose Hickman Manufacturing actually has overcapacity.

i. How does this affect your assessment of the additional $7,000 in revenue from producing more sneakers on the field?

ii. Does it change your decision on whether to discontinue production of lighted sports shoes for adults?

Now suppose your accountant points out that adult light-up sneakers actually have a positive segment margin and it is the subtraction of the common fixed costs that causes the negative revenue number of adult light-up sneakers. With that in mind, should you continue to manufacture adult light-up sneakers or should you stop making them?

Answer rating: 100% (QA)

1The 15000 cost of equipment is a sunk cost meaning it has already been incurred and cannot be recov... View the full answer