Question

Glove, Inc. manufactures baseball gloves that normally sell for $55 each. The firm currently has 400 defective gloves each of which cost the company $35 in materials, labor, and overhead. The defective gloves can be sold as is at a reduced price of $18 per glove. Alternatively, the gloves can be completely repaired at a cost of $25 per glove and sold at the regular price of $55. What would be the incremental effect on the company overall profit of repairing and selling the glove the regular price rather than selling them as defective gloves?

a. 7000 increase
b. 5600 increase
c. 2200 increase
d. 3400 decrease
e. none of the above

Answer 1

e. none of the above

Step-by-step explanation:

the manufacturing costs of the defective gloves should be considered a sunk cost since they cannot be recovered:

• alternative 1, sell defective gloves = $18 x 400 = $7,200 gain
• alternative 2, repair the gloves and sell them at normal price = ($55 - $25) x 400 = $12,000 gain

alternative 2 (repairing the defective gloves and selling them at regular price) results in a $4,800 higher gain