Question

Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 340 defective fans in inventory, which cost $59 each to manufacture. These defective units can be sold as is for $23 each, or they can be processed further for a cost of $41 each and then sold for the normal selling price. Stooge Enterprises would be better off by a

A. $9,860 net increase in operating income if the ceiling fans are repaired.
B. $23,800 net increase in operating income if the ceiling fans are sold as is.
C. $23,800 net increase in operating income if the ceiling fans are repaired.
D. $9,860 net increase in operating income if the ceiling fans are sold as is.

Answer 1

A. $9,860 net increase in operating income if the ceiling fans are repaired.

Step-by-step explanation:

If the company don't do anything with defective fans, they still occurs manufacturing cost of $20,060 (=$59 * 340)

(1) if the company sell defective units, operating income is -12,240 or loss of $12,240 =(340*$23-$20,060)

(2) if the company process further for a cost of $41 each and then sell for the normal selling price, the operating income is -2,380 loss of $2,380= 340*($93-$41) - $20,060

So if the fans are repaired, the net increase in operation income is $9,860 =(-2,380-( -12,240))