A company has the choice of either selling 600 defective units as scrap or rebui

Question

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do?

A. Sell the units as scrap.

B. Rebuild the units.

C. It does not matter because both alternatives have the same result.

D. Since both alternatives produce a loss, store the units in hopes of a better price later.

E. Throw the units away.

Explanation / Answer

B. Rebuild the units because the company is earning $ 2.40 which is higher than scrap by $0.60. Material Cost $0.60 Labor Cost $1.00 Overhead $0.80 Total Cost $2.40 Selling price $5.00 Profit $2.60

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