Exercise 10-6 Scrap or rework LO A1 A company must decide between scrapping or r

Question

Exercise 10-6 Scrap or rework LO A1 A company must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $6.00 per unit to manufacture. The units can be sold as is for $3.40 each, or they can be reworked for $4.50 each and then sold for the full price of $9.40 each. If the units are sold as is, the company will be able to build 13,000 replacement units at a cost of $6.00 each, and sell them at the full price of $9 40 each 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? (Enter costs and losses as negative values.) Sale as Scrap Incremental income (loss) The company shoud

Explanation / Answer

Ans.1 Particulars Sale as scrap Rework Sales 44200 122200 cost to reworked units -58500 Opportunity cost (sale of scrap) -44200 Incremental income/loss 44200 19500 *Calculation: Sale as scrap Rework Sales (13000*3.40) (13000*9.40) cost to reworked units (13000*4.50) Opportunity cost (sale of scrap) (13000*3.40) *The company should sell the units as scrap as its incremental income is higher than sale of reworked.

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