Question

Exercise 23-6 Scrap or rework LO A1 A company must decide between scrapping or reworking units that do not pass inspection. The company has 10,000 defective units that cost $5.50 per unit to manufacture. The units can be sold as is for $3.50 each, or they can be reworked for $4.80 each and then sold for the full price of $9.00 each. If the units are sold as is, the company will be able to build 10,000 replacement units at a cost of $5.50 each, and sell them at the full price of $9.00 each.

Answer 1

Answer: It would serve them better to sell off the units as scrap. Please refer to Explanation

Step-by-step explanation:

We'll answer this in 2steps. First we will see how much we wll make if we seel as scarp and then compare that to the cost of reworking.

Selling as Scrap

= Selling price * No. of units

= 3.5 * 10,000

= $35,000

Reworking

= Selling price * No of Units - ( opportunity cost * no. of units) - cost to rework units

Opportunity Cost

If the units are sold as is, the company will be able to build 10,000 replacement units at a cost of $5.50 each, and sell them at the full price of $9.00 each.

= Selling price - cost * units

= 9 - 5.5 * 10,000

= $35,000

So going back to our formula,

= (Selling price * No of Units) - opportunity cost - (cost to rework units * no of units)

= (9 * 10,000) - 35,000 - (4.8 * 10,000)

= $7,000

It would serve them better to sell off the units as scrap.