Question

Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:a. Sell the watches for $3 per unit.

b. Correct the defects and sell the watches at the regular price.

c. Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.

d. Sell 5,000 watches to the salvage company and repair the remainder.

e. Throw the watches away

Answer 1

Correct the defects and sell the watches at the regular price.

Step-by-step explanation:

The aim of a business is to make profit or when there is no other option, to minimise loss.

In this scenario not repairing the watch will result in

Loss from not repairing= Cost - Revenue from sale

Loss from not repairing= 8 - 3= $5 loss

However when we calculate loss when watch is repaired

Total cost= Cost to produce defective watch + Cost of repair

Total cost= 8 + 5= $13

Loss when watch is repaired= Cost - Revenue

Loss when watch is repaired= 13 - 12.50= $0.5

Therefore loss incurred will be less when the watches are repaired and sold than when they are sold as defective product.