Question

Chang Industries has 2,700 defective units of product that have already cost $14.70 each to produce. A salvage company will purchase the defective units as they are for $5.70 each. Chang's production manager reports that the defects can be corrected for $5.30 per unit, enabling them to be sold at their regular market price of $22.40. The incremental income or loss on reworking the units is:A. $45,090 income.B. $30,780 loss.C. $46,170 income.D. $14,310 loss.E. $30,780 income.

Answer 1

Option (E) is correct.

Step-by-step explanation:

The company is left with two options:

selling the defective units at a price = $5.7 each or

Reworking on the defective units that will incur an additional cost = $5.3 and

selling them at 22.4

If the company goes for reworking the defective units it will incur a cost of $5.3 for 2700 units.

Apart from this the company needs to bear the cost of not selling the defective units at a price of $5.7 each.

Total incremental cost:

= ($5.3 + $5.7)

= $11 × 2700

= $29,700

Total revenue generated from selling the units:

= Regular market price × Defective units

= $22.4 × 2,700

= 60,480

Total incremental Income:

= Total revenue generated from selling the units - Total incremental cost

= $60,480 - $29,700

= $30,780

Therefore, the incremental income on reworking the units is $30,780.