A company has the choice of either selling 500 defective units as scrap or rebui

Question

A company has the choice of either selling 500 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $7.00 per unit. Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3.00 per unit for labor, and $1.00 per unit for overhead, and then sell the rebuilt units for $15.00 each. What should the company do? A Sell the units as scrap. B Rebuild the units. C Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently. D It does not matter because both alternatives have the same result. E Throw the units away.

Explanation / Answer

Sell "as-is" value = 500 units x $7.00 sale price = $3,500 total revenue

Rebuild value = 500 units x ($15 per unit sale price - $2 per unit materials cost - $3 per unit labor cost - $1 per unit overhead cost) = 500 units x $9 revenue per unit = $4,500 total revenue

Answer: B --> Rebuild the units

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