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23 November, 15:21

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:

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  1. 23 November, 17:42
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    Star Zinc should rework the defective units as it will produce a net cash flow of $15,000

    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.
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