A company must decide between scrapping or reworking units that do not pass insp

Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 19,000 defective units that cost $5.60 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $10.10 each. If the units are sold as is, the company will be able to build 19,000 units at a cost of $5.60 each, and sell them at the full price of $10.10 each. (1) What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Deductible amounts should be indicated with a minus sign.)

Explanation / Answer

1.

Statement showing incremetal income from sale of units as scrap

Statement showing incremetal income from reworking and selling the units

2. Its better to sale as scrap.

Particular Amount Sales from scrap (19000 x 2.50) $47500 Sale of additional units(19000x10.10) 191900 Less: Cost of manufacturing 106400 Additional income 133000

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