Final answer:
In scrap or rework decisions, management should consider revenue from selling scrap, incremental costs, and existing sales, and avoid weighing sunk costs of defective units since they are not recoverable and do not inform future decision-making.
Step-by-step explanation:
When management is making decisions regarding scrap or rework, they should consider several factors that can impact the bottom line. These include the revenue from selling defective units as scrap, which may help to recover some of the production costs. Another critical consideration is incremental costs, which are additional costs incurred when producing one more unit and can help management determine whether it's cost-effective to fix the defective units or not.
Management should also review existing sales to understand the potential impact of scrap or rework on their current market presence. Lastly, while costs already incurred in producing defective units are often considered sunk costs and shouldn't influence the decision-making process for future actions, managers often consider them due to the psychological difficulty of ignoring past investments. When dealing with economic losses, a company needs to evaluate whether to continue production at the output level where price equals marginal revenue and marginal cost or shut down to incur only fixed costs. In any case, sunk costs, the costs that have already been incurred and cannot be recovered, should be set aside when making these decisions, as they are irrelevant to the future sustainability of the business.