A company must decide between scrapping or reworking units that do not pass insp
ID: 2901939 • Letter: A
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 $9.80 each. If the units are sold as is, the company will have to build 19,000 replacement units at a cost of $5.60 each, and sell them at the full price of $9.80 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?
Explanation / Answer
SCENARO 1: selling as is
income from selling the units as scrap = 19500*$2.50 = $48750
cost to manufacture these defective units = 19500*$5.60 = $109200
loss = 109200 - 48750 = $60450
it is mentioned that if the defective pieces are sold as is then the company has to build 19500 extra pieces at $5.60 and sell them at $9.80
profit from the extra 19500 pieces = 19500* ( $9.8 - $ 5.6) = $81900
total profit in this scenario = $81900 - $60450 = $21450
SCENARIO 2: Reworking
cost of reworking the units = 19500*$3.50 = $68250
total cost of reworking these units = manufacturing cost + reworking cost = $109200 + $68250 = $177450
total income from selling the reworked units = 19500*$9.8 = $191100
total profit in this scenario = 191100 - 177450 = $13650
hence profit is more in scenario 1 where the company sell the units as is
Therefore the company should sell the units as scrap.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.