Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.50 per unit to manufacture. The units can be sold as is for $2.60 each, or they can be reworked for $4.80 each and then sold for the full price of $8.10 each. If the units are sold as is, the company will be able to build 16,000 replacement units at a cost of $5.50 each, and sell them at the full price of $8.10 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 for scrap.

Step-by-step explanation:

Giving the following information:

Defective units= 16,000 units

Selling price dor scrap= $2.60

Reworked cost= $4.80 each

Selling price= $8.10 each.

If the units are sold as-is, the company will be able to build 16,000 replacement units for $5.50 each and sell them at the full price of $8.10 each.

The cost of 16,000 units produced is a sunk cost, therefore, it shouldn't be a part of the decision making.

Sell as it is:

Sell scrap= 16,000*2.9= 46,400

New units= 16,000*(8.10 - 5.50)= 41,600

Total income= $88,000

Continue processing:

Reworked sales= 16,000*(8.1 - 4.8)= $52,800

It is more profitable to sell the units for scrap.