Question

Chang industries has 1,800 defective units of product that have already cost $13.80 each to produce. a salvage company will purchase the defective units as they are for $4.80 each. chang's production manager reports that the defects can be corrected for $6.20 per unit, enabling them to be sold at their regular market price of $20.60. the incremental income or loss on reworking the units is:

Answer 1

Answer: The incremental income on reworking the units is $17,280.

The question asks us to compute incremental profit or loss on reworking defective units.

Hence the cost that has already been incurred in producing the defective units is not considered here.

The per unit incremental revenue we get by reworking the defective units is:

Incremental Revenue = (Revenue from selling reworked units) -

(Revenue from selling defective units)

Incremental Revenue (per unit) = $15.8 (20.60 - 4.80)

Incremental Cost of re-working a unit = $6.20

Incremental Income from re-working per unit = Incremental Revenue per unit -

Incremental Cost per unit

Incremental Income from reworking (per unit) = $9.60 (15.80 -6.20)

Total no. of defective units = 1,800

Total incremental income from reworking = $9.60 × 1,800 = $17,280.