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 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.00 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each.

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

Explanation / Answer

Incremental analysis: Sale as Rework & Net Increase/Decrease in Scrap Sell Income Sales revenue 44000 187000 143000 Expense of rework 0 -99000 -99000 Contribution earned on new units 55000 -55000 (22000 units @2.50) Net Incremental Income/(Loss) 99000 88000 -11000 Hence, the units must be sold as scrap without reworking.

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