Question

MC Qu. 47 Chang Industries has... Chang Industries has 1,800 defective units of product that have already cost $13.80 each to produce. A salvage company will purchase the defective units as they are for $4.80 each. Chang's production manager reports that the defects can be corrected for $6.20 per unit, enabling them to be sold at their regular market price of $20.60. The incremental income or loss on reworking the units is: Multiple Choice $17,280 loss. $25,920 income. $11,160 loss. $28,440 income. $17,280 income.

Answer 1

The correct answer is:

$17,280 income

Step-by-step explanation:

First, let us lay out the relevant information:

Total defective units = 1800

salvage company price per unit = $4.80

Total income expected from salvage company = 4.8 × 1800 = $8,640

Reworking cost per unit = $6.20

selling price per unit after reworking = $20.60

Net selling price per unit after reworking = selling price - reworking cost

= 20.60 - 6.20 = $14.40

∴ Total income from selling after reworking = 14.4 × 1800 = $25,920

To calculate for the increment or loss on the income gotten from both options, we will calculate the difference between both options as follows:

Increment or loss on income from reworking = total income from reworking - total income from salvage company

= 25,920 - 8,640 = $17,280 income. (note that a loss is not made from reworking because the total income from reworking is greater than that gotten from the salvage company)