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5 February, 06:06

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.80 per unit to manufacture. The units can be a) sold as is for $3.00 each, or b) reworked for $4.70 each and then sold for the full price of $8.80 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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  1. 5 February, 07:12
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    Defective units = 16000

    Cost of manufacture = 92800

    When sold as scrap

    Revenue = 16000*3 = $48000

    Net income = $48000

    When reworked and sold

    Cost of rework = 4.7 * 16000 = 75200

    Revenue = 8.8*16000 = 140800

    Net income = 65,600

    It is better to rework and sell.

    Incremental income on reworking and selling is 17,600
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