Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.20 per unit to manufacture. The units can be a) sold as is for $2.80 each, or b) reworked for $5.00 each and then sold for the full price of $8.00 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 $0 The company should:

Answer 1

Calculation of Incremental income /(loss) if Company go for Scrapping:

Particular	Units	Amount per unit	Total
	(i)	(ii)	(iii)[(i)*(ii)]
Scrap sales	13000	$                      2.80	$ 36,400.00
Less: Manufacturing cost	13000	$                      5.20	$ 67,600.00
Total Incremental loss	13000	$                      2.40	$ 31,200.00

Calculation of Incremental income /(loss) if company reworked defective units:

Particular	Units	Amount per unit	Total
	(i)	(ii)	(iii)[(i)*(ii)]
Sales	13000	$                      8.00	$ 1,04,000.00
Less: Manufacturing cost	13000	$                      5.20	$     67,600.00
Less: Reworking cost	13000	$                      5.00	$     65,000.00
Total Incremental loss	13000	$                      2.20	$     28,600.00

From above, As we can see if company scrap defective units then loss is $ 31,200 & $ 28,600 if rework of defective units.

	Sales as scrap	Rework
Incremental Loss	$ 31,200	$ 28,600

The company should rework the defective units as it result in miimise the loss by $ 2,600 ( $ 31,200 - $ 28,600 )