Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.40 per unit to manufacture. The units can be a) sold as is for $2.80 each, or b) reworked for $4.60 each and then sold for the full price of $8.20 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Answer 1

Incremental income for Sale as scrap is $36,400 and Rework is $46,200

Step-by-step explanation:

Sale as scrap Rework

Sales of reworked units (13000*8.2) $106,000

Sales of scrap units (13000*2.8) $36,400

Cost to rework units (13000*4.6) ($59,800)

Opportunity cost of not making new units

Incremental income (loss) $36,400 $46,200