Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.00 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each.

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Deductible amounts should be indicated with a minus sign.)
Sell as scrap Rework
Sales of scrap units
Sales of reworked units
Cost to rework units
Opportunity cost of not making new units
Incremental income (loss) $0 $0
The company should:

Answer 1

A. Sales as scrap $44,000

Rework $33,000

B. The company should sell as scrap

Step-by-step explanation:

A. Calculation to determine the incremental income from selling the units as scrap and reworking and selling the units

SALES AS SCRAP REWORK

Sales of scrap units $44,000 $0

( 22000 × $2.00)

Sale of reworked unit $0 $187,000

( 22000 × $8.50 )

Less Cost to rework unit $0 ($99,000)

(22000 × $4.50)

Less Opportunity cost of not making new unit

$0 ($55,000)

[22000 × ($8.50 - $6)]

Incremental income(loss) $44,000 $33,000

Therefore the incremental income from selling the units as scrap is $44,000 and reworking and selling the units is $33,000

B. Based on the above calculation the company should sell as SCRAP because the incremental income of SALES AS SCRAP is higher than that of rework.

Answer 2

Answer: See explanation

Step-by-step explanation:

Sell as scrap:

Sales of scrap units:

= 22000 × $2.00

= $44,000

Rework:

Sale of reworked unit = 22000 × $8.50 = $187,000

- Cost to rework unit = 22000 × $4.50 = $99,000

- Opportunity cost of not making new unit = 22000 × ($8.50 - $6) = $45000

Incremental income(loss) = $33000

Since the incremental Income from scrap is more than reworking, then it implies that the company should sell as scrap.