Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.00 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Answer 1

It is more profitable to sell the units as-is and produce new ones.

Step-by-step explanation:

Giving the following information:

The company has 22,000 defective units that cost $6 per unit to manufacture.

Sell as-is:

Selling price= $2

Rework:

Additional cost= $4.5

Selling price= $8.5

If the units are sold as-is, the company will be able to build 22,000 replacement units for $6 each and sell them at the full price of $8.50 each.

The original cost of the 22,000 units is a sunk cost, it will remain no matter the decision.

Sell as-is:

Defective units= 22,000*3= 44,000

New units= 22,000*(8.5 - 6)= 55,000

Total income= $99,000

Rework:

Sales= 22,000*(8.5 - 4.5)= $88,000

It is more profitable to sell the units as-is and produce new ones.