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 $5.30 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 $7.80 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Answer 1

If the company reworks the units, income will increase by $9,500 (57,000 - 47,500).

Step-by-step explanation:

Giving the following information:

Sell as-is:

Selling price= $2.5

Rework:

Selling price= $7.8

Incremental unitary cost= $4.8

We need to determine the impact of each option on the income:

Sell as-is:

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

Rework:

Effect on income= 19,000*(7.8 - 4.8)

Effect on income= $57,000 increase

If the company reworks the units, income will increase by $9,500 (57,000 - 47,500).