Question

Signal mistakenly produced 1,000 defective cell phones. The phones cost $65 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $88 per phone to rework the phones. If the phones are reworked, Signal could sell them for $144 each. Signal has excess capacity. Should Signal scrap or rework the phones?

Answer 1

Answer:

It is more profitable to continue to rework the phones and sell them.

Explanation:

Giving the following information:

Signal mistakenly produced 1,000 defective cell phones.

The $65 per phone is a sunk cost. It will remain on both decisions, therefore, we will not take into account to make the decision.

Sell as it is:

Income= 33*1,000= $33,000

Rework:

Costs= 88*1,000= $88,000

Sales= 144*1,000= $144,000

Total gain= $56,000

It is more profitable to continue to rework the phones and sell them.