Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 19,000 defective units that cost $5.20 per unit to manufacture. The units can be a) sold as is for $2.50 each, or b) reworked for $4.80 each and then sold for the full price of $7.70 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? (Enter costs and losses as negative values.)

Answer 1

If the company reworks the units, income will increase by $7,600 (55,100 - 47,500).

Step-by-step explanation:

Giving the following information:

Number of units= 19,000

Sold as-is:

Selling price= $2.5

Rework:

Selling price= $7.7

Incremental income= $4.8

First, we will calculate the effect on income of both options:

Sold as-is:

Effect on income= 2.5*19,000= $47,500

Rework:

Effect on income= 19,000*(7.7 - 4.8)

Effect on income= $55,100

If the company reworks the units, income will increase by $7,600 (55,100 - 47,500).