A company must decide between scrapping or reworking units that do not pass insp
ID: 2474487 • Letter: A
Question
A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each. What is the incremental income from selling the units as scrap reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)Explanation / Answer
Particulars
Sale as Scrap
Rework
Sale of scrap units
$ 55,000
Sale of reworked units
$ 187,000
Cost to reworks
$ (99,000)
Opportunity Cost of not making new units
$ (55,000)
incremental income (Loss)
$ 55,000
$ 33,000
The company should sell as scrap.
Working note:
(1) The incremental income from selling as scrap = 22,000 × $2.50 = $ 55,000
(2) Incremental Income from Rework :
Sale of reworked units = 22,000 units x $8.50 = $ 187,000
Less cost to rework units = 22,000 x $4.50 = $(99,000)
Less opportunity cost of not making new units = 22,000 x $2.50 = $ (55,000)
Incremental income = $ 33,000
Particulars
Sale as Scrap
Rework
Sale of scrap units
$ 55,000
Sale of reworked units
$ 187,000
Cost to reworks
$ (99,000)
Opportunity Cost of not making new units
$ (55,000)
incremental income (Loss)
$ 55,000
$ 33,000
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