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 19,000 defective units that cost $5.60 per unit to manufacture. The units can be sold as is for $2.70 each, or they can be reworked for $4.70 each and then sold for the full price of $8.30 each. If the units are sold as is, the company will be able to build 19,000 replacement units at a cost of $5.60 each, and sell them at the full price of $8.30 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) The company should

Explanation / Answer

Answer

Working

Sale as Scrap

Rework

A

Units

19000

19000

B

If Sold

[19000 x 2.7] 51300

[19000 x 8.3] 157700

C

Cost to produce defective units

[19000 x 5.6] 106400

[19000 x 5.6] 106400

D

Replacement cost/Rework Cost

[19000 x 5.6] 106400

[19000 x 4.7] 89300

E

Sale of replacement units produced

[19000 x 8.3] 157700

NA

E+B - (C+D)

Incremental Income (loss)

(3800)

(38000)

The incremental losses are minimum if the defective products are first sold as scrap (as they are, without any rework), and produce replacement units on their place and sell them at $8.3 each. The incremental losses in case of Rework of the defective units are more.

Hence, The Company should Sale the defective as scraps

Working

Sale as Scrap

Rework

A

Units

19000

19000

B

If Sold

[19000 x 2.7] 51300

[19000 x 8.3] 157700

C

Cost to produce defective units

[19000 x 5.6] 106400

[19000 x 5.6] 106400

D

Replacement cost/Rework Cost

[19000 x 5.6] 106400

[19000 x 4.7] 89300

E

Sale of replacement units produced

[19000 x 8.3] 157700

NA

E+B - (C+D)

Incremental Income (loss)

(3800)

(38000)

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