Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $6.00 per unit to manufacture. The units can be a) sold as is for $3.10 each, or b) reworked for $4.80 each and then sold for the full price of $9.10 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.)

Answer 1

Answer:

It is more profitable to rework the units and sell them for $9.1 each.

Explanation:

Giving the following information:

The company has 16,000 defective units that cost $6.00 per unit to manufacture. The units can be a) sold as-is for $3.10 each, or b) reworked for $4.80 each and then sold for the full price of $9.10 each.

The first $6 per unit is a sunk cost, it will remain the same in both options. Therefore, it should not be taken into account to make a decision.

We need to compute the net income of each option:

Sell as-is:

Effect on income= 16,000*3.1= $49,600

Rework:

Effect on income= 16,000*(9.1 - 4.8)= $68,800

It is more profitable to rework the units and sell them for $9.1 each.