Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.70 per unit to manufacture. The units can be sold as is for $2.60 each, or they can be reworked for $5.00 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 16,000 replacement units at a cost of $5.70 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.)

Answer 1

• All working forms part of the answer
• Incremental benefit:

	Sales as in without reworking	Rework and Sales	Incremental Benefit of Reworking and selling
	[Alternative 1]	[Alternative 2]
Sales:
Normal Sales	$              132,800	Nil	$               (132,800)
Rework Sales	NiL	$              132,800	$                 132,800
Sale as Scrap	$                41,600	Nil	$                 (41,600)
Total Sales	$              174,400	$              132,800	$                 (41,600)
Costs:
Cost of rework	Nil	$                80,000	$                 (80,000)
Cost of producing	$                91,200		$                   91,200
Total Costs	$                91,200	$                80,000	$                   11,200
Net Benefit	$                83,200	$                52,800	$                 (30,400)

--Working for above

	Sales as in without reworking	Rework and Sales
Sales:
Normal Sales	=16000 units x $ 8.3
Rework Sales		=16000 units x $ 8.3
Sale as Scrap	=16000 units x $ 2.6
Costs:
Cost of rework		=16000 units x $ 5
Cost of producing	=16000 units x $ 5.7

• DECISION

--Since the Incremental Benefits are negative[decreased] if the units are reworked and then sold, the company should sell the units as scrap, without reworking them [Alternative 1]