PROBLEM $21\mathrm{.}5$A

Decision to Sell or Rebuild Deficient Units

Louie Optics manufactures an underwater digital camera. The company's newest model is very popular, but it has an inventory of $5,000$ old models for which there is little demand. The company is considering the following options for disposing of these old models.

Sell them to a discount mail$-$order company at a total price of $$1,900,000.$ The mail$-$order firm would then sell these old models at a unit price of $$480.$

Convert them to new models at a remanufacturing cost of $$600$ per unit. These new models then could be sold to camera stores for $$1,000$ each, The old models had been manufactured at a cost of $$525$ per unit. The cost of manufacturing new models, however, normally amounts to $$700$ per unit.

Instructions

a$.$ Perform an incremental analysis of the revenue, costs, and profit resulting from converting the old models to new models as compared with selling them to the mail$-$order firm.

b$.$ Identify any sunk costs, out$-$of$-$pocket costs, and possible opportunity costs.

c$.$ Indicate which of these options you would select and explain your reasoning, assuming that Louie Optics currently

Has substantial excess capacity.

Is operating at full capacity manufacturing new models.