Question

Road Master Shocks has 15,000 units of a defective product on hand that cost $80,000 to manufacture. The company can either sell this product as scrap for $6 per unit or it can sell the product for $9 per unit by reworking the units and correcting the defects at a cost of $40,000. Prepare a schedule to show the effect of selling the defective units as scrap or rework.

Answer 1

Answer:

If the units are reworked, net income will increase by $5,000.

Explanation:

Giving the following information:

Number of units= 15,000

Sell as-is:

Selling price= $6 per unit

Rework:

Selling price= $9

Total cost= $40,000

The original production costs ($80,00) should not be taken into account because they remain constant for the two options.

Now, we will determine the effect on the income of both choices:

Sell as-is:

Effect on income= 6*15,000= $90,000 increase

Re-work:

Revenue= 15,000*9= 135,000

Total cost= (40,000)

Effect on income0 $95,000 increase

If the units are reworked, net income will increase by $5,000.