A company must decide between scrapping or reworking units that do not pass insp

Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.60 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.40 each. If the units are sold as is, the company will also be able to build 13,000 replacement units at a cost of $5.60 each, and sell them at the full price of $9.40 each. What is the incremental income from reworking and selling the units?

Explanation / Answer

Q: What is the incremental income from selling the units as scrap?

Answer:

Sale of scrap unit (15,000 @ 2.50) $37,500

Sale of new units produced (15,000 @ 9.10) 136,500

Less cost to produce the new units (15,000 @ 5.30) (79,500)

Incremental income from selling as scrap is $94,500

Q: What is the incremental income from reworking and selling the units?

Answer:

Sale of reworked units (15,000 @ 9.10) $136,500

Less cost to rework units (15,000 @3.50) (52,500)

Less opportunity cost of not making new units (15,000 @ (9.10-5.30)) (57,000)

Incremental income from reworking and selling units $27,000

Note: If doing on Connect, Connect was giving me issues and miscalculating some parts of the solution, therefore giving me the incorrect answer (even though my math was correct). May want to check their math.

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