Question

Blake’s Manufacturing sells unfinished wood pieces for $150 each. The manager reported 280 defective wood pieces in inventory, which cost $20 to refabricate. The manager can sell the defective pieces for $30 each, or process the wood further for $10 each, and then sell them for the standard sales price.

Answer 1

Blake has already spent $5,600 in the production of the 280 defective units. It has to decide whether to sell them at $30 per unit or keep processing them at an additional cost of $10 per unit and then sell them at the regular price of $150 per unit.

If Blake decides to sell the defective units as they are it would get $8,400 in revenue, with a gross profit of $2,800 (= $8,400 - $5,600).

If Blake decides to further process the defective units and sell them, it would get $42,000 in revenue, with a gross profit of $33,600 (= $42,000 - $8,400).

The difference between further processing the defective units or selling them as they are is an incremental income of $30,800 (= $33,600 - $2,800)