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 16,000 defective units that cost $5.20 per unit to manufacture. The units can be sold as is for $3.20 each, or they can be reworked for $4.60 each and then sold for the full price of $8.40 each. If the units are sold as is, the company will be able to build 16,000 replacement units at a cost of $5.20 each, and sell them at the full price of $8.40 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 Rework Incremental income (loss) 0 The company should:

Explanation / Answer

Answer:-

Where:-

The incremental income from selling as a scrap is 16000 units*$3.20per unit =$51200

Selling price per unit - cost per unit =$8.40 per unit-$5.20 per unit =$3.20 per unit

The product should not be reworked as the $9600 income from reworking is less than the $51200 the income from selling is.

Incremental Income Particulars Sale as Scrap Rework $ $ Sale of scrap units 16000 units*$3.20 per unit 51200 Sale of reworked units 16000 units*$8.40 per unit 134400 Cost of reworked units 16000 units*$4.60 per unit -73600 Opportunity cost of not making new units 16000 units*3.20 per unit -51200 Incremental Income (loss) 51200 9600

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