Question

The management of City Front Inc. must decide between scrapping or reworking units that do not pass inspection. The company has 11,000 defective units that cost $6.00 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 $9.70 each. What is (are) the relevant cost(s) in this decision? a. Rework cost of $3.50 per unit b. Manufacturing cost of $6.00 and rework cost of $3.50 per unit c. Rework cost of $3.50 and opportunity cost of $2.50 per unit d. Manufacturing cost of $3.50 and opportunity cost of $2.50 per unit.

Answer 1

Answer:

a). relevant cost=$38,500

b). relevant cost=$104,500

c). relevant cost=$66,000

d). relevant cost=$66,000

Explanation:

a).

Relevant cost for a rework cost of $3.50 per unit

relevant cost=rework cost per unit×number of units

where;

rework cost per unit=$3.50

number of units=11,000

replacing;

relevant cost=(3.5×11,000)=$38,500

b).

relevant cost=total rework cost+total manufacturing cost

total rework cost=rework cost per unit×number of units

total manufacturing cost=manufacturing cost×number of units

relevant cost=(rework cost per unit×number of units)+(manufacturing cost per unit×number of units)

where;

rework cost per unit=$3.50

number of units=11,000

manufacturing cost per unit=$6.00

number of units=11,000

replacing;

relevant cost=(3.50×11,000)+(6.00×11,000)=$104,500

c).

Rework cost and opportunity cost

relevant cost=(rework cost per unit×number of units)+(opportunity cost per unit×number of units)

where;

rework cost per unit=$3.50

number of units=11,000

opportunity cost per unit=$2.50

number of units=11,000

replacing;

relevant cost=(3.50×11,000)+(2.50×11,000)=$66,000

d).

Manufacturing cost and opportunity cost

relevant cost=(manufacturing cost per unit×number of units)+(opportunity cost per unit×number of units)

where;

manufacturing cost per unit=$3.50

number of units=11,000

opportunity cost per unit=$2.50

number of units=11,000

replacing;

relevant cost=(3.50×11,000)+(2.50×11,000)=$66,000