Question

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is

Answer 1

If the company decides to rework the units, net income will increase by $20,000.

Step-by-step explanation:

Giving the following information:

Units= 2,000

A salvage company will purchase the defective units as they are for $5 each.

Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.

The firsts costs incurred are sunk costs, therefore, they are irrelevant. They will remain constant on both decisions.

Sell as-is:

Effect on income= 2,000*5= $10,000

Rework:

Effect on income= 2,000*(21 - 6)= $30,000 increase

If the company decides to rework the units, net income will increase by $20,000.