A company has the choice of either selling 1,000 defective units as scrap or reb

Question

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?

Sell the units as scrap.
Rebuild the units.
It does not matter because both alternatives have the same result.
Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
Throw the units away.

Explanation / Answer

Sold as scrap
Total revenue - total incremental cost: 1000 x $4 -0= 4000

Rebuild
Total revenue - total incremental cost = 1000 x 8 - 1000 x (1+2+1.5) = 3500

Thus, the wise decision should be sell the units as scrap as it earned more profits

Hope this helps!

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