Question

25 . Y Corporation produced 10,000 defective radios. The radios cost $8 each. A salvage company will pay $3 each for the defective radios. Y's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular price of $12.50 each. Y should: Question 25 options: A. Sell the units to the salvage company for $3 per unit. B. Correct the defects and sell the radios at the regular price. C. Sell the radios at $3 because repairing them will cause their total cost to exceed their selling price. D. Sell 5,000 radios to the salvage company and repair the remainder. E. Do something else.

Answer 1

The correct option would be option B which states that, Correct the defects and sell the radios at the regular price.

Step-by-step explanation:

In this question, we are asked to find out the best possible answer or solution for the company to use and explain the reason behind it as well.

Solution:

The correct option would be option B which states that, Correct the defects and sell the radios at the regular price.

Reasoning:

Data Given:

10,000 defective radios

Cost of radio = $8

Salvage company will pay = $3 for each.

Defect can be correct at = $5 each

Selling price after correcting the defects = $12.50

So,

Radio cost is sunk as it has been already incurred - $8

Now, there are only two options left:

1. Sell the radios at salvage company for = $3

Loss = 8-3 = $5 each = 10,000 x 5$ = $50,000

or

2. Correct the radios and sell at the regular price.

Incremental revenue = $12.50

Incremental Cost = $5.00

Incremental Contribution = 12.50 - 5.00 = $7.50

Loss = 8 - 7.50 = $0.50 each = 10,000 x 0.50 = $5000

Company will save $45000 losses if decides to choose B as the correct strategy.

Hence, option B is correct.