Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 10,000 defective units that cost $5.20 per unit to manufacture. The units can be sold as is for $2.60 each, or they can be reworked for $4.90 each and then sold for the full price of $7.80 each. If the units are sold as is, the company will be able to build 10,000 replacement units at a cost of $5.20 each, and sell them at the full price of $7.80 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Answer 1

It is better to rework, which has an incremental income of 3,000

Step-by-step explanation:

`\left[\begin{array}{cccc}&sale&rework&Differential\\Beginning \: Cost(A)&-52,000&-52,000&0\\rework(B)&&-49,000&-49,000\\Sales&26,000(C)&78,000(D)&52,000\\Incremental Income&-26,000&-23,000&3,000\\\end{array}\right]`

Notes:

(A)

10,000 x 5.2 = 52,000

(B)

10,000 x 4.9 = 49,000

(C)

10,000 x 2.6 = 26,000

(D)

10,000 x 7.8 = 78,000