Signal mistakenly produced 1,000 defective cell phones. The phones cost $65 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $88 per phone to rework the phones. If the phones are reworked, Signal could sell them for $144 each. Signal has excess capacity. Should Signal scrap or rework the phones?

Question

Business

Sonia Coffey

11 April, 06:57

Signal mistakenly produced 1,000 defective cell phones. The phones cost $65 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $88 per phone to rework the phones. If the phones are reworked, Signal could sell them for $144 each. Signal has excess capacity. Should Signal scrap or rework the phones?

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Answers (1)

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Colten · Answer 1

It is more profitable to continue to rework the phones and sell them.

Explanation:

Giving the following information:

Signal mistakenly produced 1,000 defective cell phones.

The $65 per phone is a sunk cost. It will remain on both decisions, therefore, we will not take into account to make the decision.

Sell as it is:

Income = 33*1,000 = $33,000

Rework:

Costs = 88*1,000 = $88,000

Sales = 144*1,000 = $144,000

Total gain = $56,000

It is more profitable to continue to rework the phones and sell them.