Question

Ahngram Corp. has 1,000 defective units of a product that cost $2.50 per unit in direct costs and $6.00 per unit in indirect cost when produced last year. The units can be sold as scrap for $3.50 per unit or reworked at an additional cost of $2.00 and sold at full price of $10.50. The incremental net income (loss) from the choice of reworking the units would be: Multiple Choice $3,500. $0. ($2,000). $8,500. $2,000.

Please explain how you get the answer. Thank you!

Answer 1

Answer: $8,500

Direct cost in last year must not be considered in this year, because this is not relevant in today’s decision making.

Indirect cost must not be considered here, since this is unavoidable.

Incremental income = {Selling price – Direct cost to reworking per unit} × Number of units

                                    = {10.50 – 2} × 1,000

                                    = 8.5 × 1,000

                                    = $8,500