Question

ignal mistakenly produced 1,175 defective cell phones. The phones cost $67 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $90 per phone to rework the phones. If the phones are reworked, Signal could sell them for $134 each. Signal has excess capacity. Should Signal scrap or rework the phones

Answer 1

Company shall rework on the cell phones.

Step-by-step explanation:

In the given case we will do the comparison of the rework with the scrap.

In case of rework:

Total cost = $67 of manufacturing + $90 of rework = $157 each unit

Selling price then would be = $134 each

Loss on per unit = $157 - $134 = $23 on each cell phone.

In case no rework is done and the mobile phones are sold in scrap then the cost associated = $67 each

Value for sale = $33 each

Loss per unit on such sale = $67 - $33 = $34 each unit.

Since there is plenty of idle capacity the company in order to decrease the loss from selling these defective cell phones, the company shall rework on the phones, as loss in this case will be $34 - $23 = $11 per cell phone less than the loss in case of scrap sale.