Exercise 23-6 Scrap or rework LO A1 A company must decide between scrapping or r

Question

Exercise 23-6 Scrap or rework LO A1 A company must decide between scrapping or reworking units that do not pass inspection. The company has 10,000 defective units that cost $5.10 per unit to manufacture. The units can be sold as is for $3.10 each, or they can be reworked for $4.80 each and then sold for the full price of $8.20 each. If the units are sold as is, the company will be able to build 10,000 replacement units at a cost of $5.10 each, and sell them at the full price of $8.20 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 Incremental income (loss) 0 should:

Explanation / Answer

SOLUTION

The company should sell as it is.

Sale as scrap ($) Rework ($) Sales of scrap units (10,000*$3.10) 31,000 Sales of reworked units (10,000*$8.20) 82,000 Cost to rework units (10,000*$4.80) (48,000) Opportunity cost of not making new units (31,000) Incremental income (loss) 31,000 3,000

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