Question

Ahngram Corp. has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year. The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12. The incremental net income (loss) from the choice of reworking the units, versus selling them as scrap, would be:

Answer 1

$5500

Step-by-step explanation:

Given:

Total number of defective units = 1,000

Direct cost per unit of the product = $3

Indirect cost for the product = $6.50 per unit

Scrap value of the product = $4 per unit

Reworking cost of the product = $2.50 per unit

Selling price of the reworked product = $12

Now,

The revenue generated by selling the product after reworking

= Selling price of the reworked product - Reworking cost of the product

= $12 - $2.50 = $9.50 per unit

and,

the revenue from the selling the product as scrap = $4

Hence, the net incremental income from reworking and selling

= revenue generated after reworking - revenue from the selling as scrap

= $9.50 - $4 = $5.50 per unit

Therefore,

For 1,000 units the net incremental income would be = $5.50 × 1000

= $5500