Question

StarZinc Company produced 200 defective units last month at a unit manufacturing cost of $50. The defective units were discovered before leaving the plant. StarZinc can sell them as is for $35 or can rework them at a cost of $40 and sell them at the regular price of $100. The total relevant cost of reworking the defective units is:______.

a. $7,800.
b. $5,000.
c. $8,500.
d. $9,100.

Answer 1

The total relevant cost of reworking the defective units is the cost of rework ($8,000) plus the opportunity cost ($7,000), resulting in $15,000. This amount does not match any of the provided options.

Step-by-step explanation:

The total relevant cost of reworking the defective units for StarZinc Company at a unit cost of $40 can be calculated by multiplying the cost of reworking each unit by the number of defective units, which is 200. Thus, the total rework cost will be 200 units × $40 = $8,000.

However, since the defective units could be sold as is for $35 each, there is an opportunity cost of not selling them in their defective state. This opportunity cost is equal to the potential revenue from selling the defective units, which is 200 units × $35 = $7,000.

Therefore, the total relevant cost of reworking is the cost of rework plus the opportunity cost, which is $8,000 (rework cost) + $7,000 (opportunity cost) = $15,000.

Answer 2

See below

Step-by-step explanation:

The cost of producing the defective units is irrelevant to the decision as to rework or to sell the defective units

Option 1

Rework

Sales revenue from sales (200 × $100) = $20,000

Relevant cost 40 × 200

$8,000

Net cash flow

$12,000

Option 2

Outright sale

Revenue from outright sales $35 × 200

$7,000

Starzinc should rework the defective units at it will produce a net cash flow of $12,000