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 15,000 defective units that cost $5.80 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 $10.10 each. If the units are sold as is, the company will also be able to build 15,000 replacement units at a cost of $5.80 each, and sell them at the full price of $10.10 each. What is the incremental income from selling the units as scrap? What is the incremental income from reworking and selling the units?

Explanation / Answer

Ok the company is going to lose money on the defective untis no matter what it is just a question of how much. If they sell as is they cost 6.00 and will only be sold for 2.5 ( total loss 3.5 per unit = -52500 ) Or if they re work they still cost 6.00 but an extra 4.5 for the rework. Can still only be sold for 9.0 so they will lose 1.5 per unit total loss -22500. The good thing is that they still have to make the new units which they will be able to sell for a profit of 3.0 per unit. So total profit on new units is 45,000. The final answer depends what they are doing with the old units ? If they sell as is they lose both ways as the initial loss out ways any profit. e.g profit on new units 45,000 loss on old units -52500 total loss -7500 But if they rework the units e.g loss on old units -22500 profit on new units 45000 total profit 22500 Hope this makes sense?

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.