A company has the choice of either selling 500 defective units as scrap or rebui

Question

A company has the choice of either selling 500 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $7.00 per unit. Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3 per unit for labor, and $1 per unit for overhead, and then sell the rebuilt units for $15 each. What should the company do?

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

Throw the units away.

Rebuild the units.

Sell the units as scrap.

Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.

Explanation / Answer

Answer: Rebuild the units

Explantion:

Rebuild and sell will give more margin than the sold as a scrap.

Cost already incurred are irrelavant as a sunk costs.

Particulars Sold as scrap Rebuild and sell Sale price $7 $15 Incremetal costs Materials $2 labor $3 Overhead $1 Incremental margin $7 $9

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