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 $6.00 per unit to manufacture. The units can be a) sold as is for $3.10 each, or b) reworked for $5.00 each and then sold for the full price of $9.10 each. What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

Question

Business

Tomas Mueller

23 August, 07:26

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 $6.00 per unit to manufacture. The units can be a) sold as is for $3.10 each, or b) reworked for $5.00 each and then sold for the full price of $9.10 each. What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

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Blevins · Answer 1

The company should rework and sell defective products because profits are higher

Explanation:

We need to find the profit that will be generated when the defective goods are sold as scrap and when they are reworked.

Selling as scrap

Profit from scrap = Unit sales price * quantity

Profit from scrap = 3.10 * 13,000

Profit from scrap = $40,300

Reworking the defective products

Profit from rework = Sales revenue - cost of rework

Profit from rework = (9.1 * 13,000) - (5 * 13,000)

Profit from rework = 118,300 - 65,000

Profit from rework = $53,300

As profit from rework is higher we should rework and sell the defective products