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ABA202A COST AND MANAGERIAL ACCOUNTING

CHAPTER 10 EXERCISE

QUESTION 12
LO.1LO.3 (Relevant costs; sunk costs) Prior to the 2009 Super Bowl, a Phoenixarea retailer ordered
50,000 T-shirts that read: Arizona Cardinals2009 Super Bowl Champs. The company paid $11.75 for each
of the custom T-shirts. Following the loss of Arizona to the Pittsburgh Steelers, the retailer found itself with
15,000 unsold T-shirts after the Super Bowl. Before the Super Bowl, the retailer was able to sell 35,000 of
the T-shirts at an average per-unit price of $25. The company is currently deciding how to dispose of the
15,000 remaining T-shirts. The retailer has learned from one of its suppliers that each shirt could be
reworked at an average cost of $5.50 per shirt (which involves removing the Super Bowl reference from the
shirts). Management of the retailer believes the reworked shirts could be sold at an average price of $10.25
during the coming football season. Alternatively, the company could sell the shirts at an average price of
$2.60 as scrap material.
a. Identify at least three alternative courses of action management could take with regard to the leftover
T-shirts.
b. Which costs are sunk in this decision?
c. Identify the relevant costs of each alternative you listed in part (a).
d. Based on your answer to part (c), what is the best alternative and what is the relative financial
advantage of the best alternative over the second-best alternative?
Answer: