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 $5.3 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 $9.1 each. If the units are sold as is, the company will have to build 15,000 replacement units at a cost of $5.3 each, and sell them at the full price of $9.1 each.

(1)
What is the incremental income from selling the units as scrap? (Omit the "$" sign in your response.)

Incremental income $

(2)
What is the incremental income from reworking and selling the units? (Omit the "$" sign in your response.)

Incremental income $

Explanation / Answer

(1) What is the incremental income from selling the units as scrap? Scrap sale price pu = $2.50 Mfg cost u = $5.30 is a sunk cost. So If 15000 units are sold as scrap, Incremental Income = 15000*$2.50 = $37,500 (2) What is the incremental income from reworking and selling the units? PL note that Mfg cost of $5.30 is a sunk cost wrt Scrap units. Total cost including reowrk cost for scrap unit = $5.30+$3.50 = $8.80 Sale price is $9.10 So COnt pu = 9.10-8.80 = 0.30 So Total Incremental income = 15000*0.30 = $4500

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