Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.50 per unit to manufacture. The units can be a) sold as is for $2.60 each, or b) reworked for $4.60 each and then sold for the full price of $8.10 each.

Answer 1

Answer:

It shall rework as total loss shall be reduced by $13,000

Explanation:

As provided the original cost to manufacture = $5.50

In case no rework is done, then amount to be recovered from each unit = $2.60

Thus, non recoverable amount = $5.50 - $2.60 = $2.90

In case of rework, original cost will be same = $5.50

Rework cost = $4.60

Thus, total cost incurred on each unit = $5.50 + $4.60 = $10.10

Amount to be recovered = $8.10

Amount not recoverable = $10.10 - $8.10 = $1.90

Since the loss is less in case of rework by $1 = $2.90 - $1.90

Rework shall be done as will save in total $1 $\times$ 13,000 = $13,000 of loss.