Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 19,000 defective units that cost $5.40 per unit to manufacture. The units can be a) sold as is for $3.40 each, or b) reworked for $4.80 each and then sold for the full price of $8.80 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 convenient to rework the units and sell them for the full price.

Explanation:

Giving the following information:

The company has 19,000 defective units.

The units can be:

a) sold as-is for $3.40 each

b) reworked for $4.80 each and then sold for the full price of $8.80 each.

We won't take into account the firsts $5.4 costs because they are irrelevant for the decision-making process.

Sell as-is:

Effect on income= 19,000*3.4= $64,600

Rework:

Effect on income= 19,000*(8.8 - 4.8)

Effect on income= $76,000

It is more convenient to rework the units and sell them for the full price.