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 10,000 defective units that cost $5.70 per unit to manufacture. The units can be sold as is for $3.20 each, or they can be reworked for $4.70 each and then sold for the full price of $8.90 each. If the units are sold as is, the company will be able to build 10,000 replacement units at a cost of $5.70 each, and sell them at the full price of $8.90 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) The company should: KPrey 32 of 35 Next> 2

Explanation / Answer

For selling units as scrap:

Total manufacturing cost= 5.7 * 10000=- 57000

Income from selling these= 3.2*10000= 32000

Cost of rebuilding= 5.7*10000= -57000

Income from selling after rebuilding=8.9*10000= 89000

Hence, net incremental income= -57000+32000 -57000+89000=7000

For selling after reworking:

Total manufacturing cost=-57000

Reworking cost=4.7*10000=-47000

Final selling income=8.9*10000=89000

Hence, net incremental income=-57000 -47000 +89000 = -15000

Therefore the company should sell the units as scrap.

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