Question

StarZinc Company produced 200 defective units last month at a unit manufacturing cost of $50. The defective units were discovered before leaving the plant. StarZinc can sell them as is for $35 or can rework them at a cost of $25 and sell them at the regular price of $100. The total relevant cost of reworking the defective units is:

Answer 1

Star Zinc should rework the defective units as it will produce a net cash flow of $15,000

Step-by-step explanation:

The cost of producing the defective units is Irrelevant to the decision as to rework or to sell the defective units.

Option 1

Rework: $

Sales revenue from sale = (100×200) = 20,000

Relevant cost (25× 200) = 5000

Net cash flow 15,000

Option 2: Outright sale

Revenue from outright sales = 35× 200 = 7,000

Star Zinc should rework the defective units as it will produce a net cash flow of $15,000.