Question

Signal mistakenly produced 1,000 defective cell phones. The phones cost $60 each to produce. A salvage company will buy the defective phones as they are for $30 each. It would cost Signal $80 per phone to rework the phones. If the phones are reworked, Signal could sell them for $120 each. Signal has excess capacity. Should Signal scrap or rework the phones

Answer 1

Signal Company

Signal should rework the phones with its excess capacity. Reworking reduces its loss by $10,000 (or $10 per phone).

Step-by-step explanation:

a) Data and Calculations:

Number of defective cell phones produced = 1,000

Cost of production per phone = $60

Salvage value per phone = $30

Additional rework cost per phone = $80

Selling price after reworking per phone = $120

Differential Analysis:

Scrap Rework Difference

Sales revenue $30,000 $120,000 $90,000

Cost of production 60,000 140,000 80,000

Loss $30,000 $20,000 $10,000

Per unit calculations:

Scrap Rework Difference

Sales revenue $30 $120 $90

Cost of production 60 140 80

Loss $30 $20 $10