Question

Signal mistakenly produced 1,075 defective cell phones. The phones cost $66 each to produce. A salvage company will buy the defective phones as they are for $38 each. It would cost Signal $86 per phone to rework the phones. If the phones are reworked, Signal could sell them for $136 each. Signal has excess capacity. Should Signal scrap or rework the phones.

Required:
Compute the incremental net income from reworking the phones.

Answer 1

If the phones are reworked, income will increase by $12,900.

Step-by-step explanation:

Because we need to determine the incremental income, we will not take into account the original costs. They remain constant in both options.

Sell as-is:

Effect on income= 1,075*38

Effect on income= $40,850 increase

Rework:

Effect on income= 1,075*(136 - 86)

Effect on income= $53,750

If the phones are reworked, income will increase by $12,900.