Roxie Company has 17,500 units of its sole product that it produced last year at
ID: 2389651 • Letter: R
Question
Roxie Company has 17,500 units of its sole product that it produced last year at a cost of $45 each. This year's model is superior to last year's and the 17,500 units cannot be sold for their regular selling price of $80 each. Roxie has two alternatives for these items: (1) they can be sold to a wholesaler for $35 each, or (2) they can be reworked at a total cost of $450,000 and then sold for $60 each. The company has enough idle capacity to rework these items without affecting any new production. Which choice would increase the company's profits the most?Reworking, because profit will increase by $600,000 more than scrapping.
Scrapping, because profit will increase by $612,500 more than reworking.
Reworking, because profit will increase by $12,500 more than scrapping.
Scrapping, because profit will increase by $12,500 more than reworking.
Reworking because profit will increase by $450,000 more than scrapping.
Explanation / Answer
Scrapping
Profit/(Loss) = 17500 x 35 - 17500 x 45= $(175000)
Reworking
Profit = 17500 x 60 -450000 -17500 x 45= $(187500)
Thus, scraping will be a better choice, as it will increase the profit by $12,500 compared to reworking.
Hope this helps!
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