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 10,000 defective units that cost S5.20 per unit to manufacture. The units can be sold as is for $3.20 each, or they can be reworked for $3.40 each and then sold for the full price of $7.80 each. If the units art sold as is. the company will be able to build 10,000 replacement units at a cost of $5.20 each, and sell them at the full price of $7.80 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.) Opportunity cost of not making new units Cost to rework units Sales of scrap units Sales of reworked units Incremental income (loss)

Explanation / Answer

1)

The Company Should sell the unit as scrap

Working

Oppurtunity Cost of not making new units = (7.80-5.20)*10000 = 26000

Cost to rework units = 10000*3.40 = 34000

Sales as scrap units = 10000*3.20 = 32000

Sale of Reworked Unit = 7.8*10000 = 78000

Sale as Scrap Rework Oppurtunity Cost of not making new units 0 -26000 Cost to rework units 0 -34000 Sales as scrap units 32000 0 Sale of Reworked Unit 0 78000 Incremental Income (Losses) 32000 18000

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