Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.20 per unit to manufacture. The units can be sold as is for $3.00 each, or they can be reworked for $5.00 each and then sold for the full price of $8.20 each. If the units are sold as is, the company will be able to build 13,000 replacement units at a cost of $5.20 each, and sell them at the full price of $8.20 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Answer 1

Answer: $67,600 and $2600

Step-by-step explanation:

Total unit = 13,000

Defective unit cost = $5.20

Resale price = $3.00

Reworked = $5.00

Full price = $8.20

Opportunity cost

= Full price - replacement unit

= 8.20 - 5.20

= 3.00

= . Cost of reselling

= 13,000 × 3.00

= $39,000

1. Cost of defective units

= 13,000 × 5.20

= $67,600

2. Cost of reworked

= $5.00 × 13,000

= $65,000

3. Full price

= 13,000 × $8.20

= $106,600

B. Incremental income of selling the unit as scrap and reworked

Scarp = $67, 600

Reworked = $(106600 -39, 000- 65,000)

= $2600