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 13,000 defective units that cost $5.60 per unit to manufacture. The units can be sold as is for $3.20 each, or they can be reworked for $4.90 each and then sold for the full price of $8.80 each. If the units are sold as is, the company will be able to build 13,000 replacement units at a cost of $5.60 each, and sell them at the full price of $8.80 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.) Sale as Scrap Rework Cost to rework units Opportunity cost of not making new units Sales of reworked units Sales of scrap units ncremental income (loss) The company should: Sell as is

Explanation / Answer

first situation (sold as scrap)

so the loss would be (5.6-3.2) x 13000 = 31200

second situation (reworking)

by reworking additional $4.9 would be incurred so total cost would become (5.6+4.9) and sold it for $8.8, in this situation also as loss of $1.7 would be incurred ($10.5-$8.8)

third situation

In third situation units are sold as it is so loss of $2.4 per unit(5.6-3.2) will be incurred and again $5.6 per unit cost will be incurred to produce 13000 units so the total cost will become in this situation will be (2.4+5.6) $8 per unit and sold for $8.8 so this situation will earn a profit of $0.8 per unit

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