Question

Piti Corp. makes and sells a product that normally sells for $19. Because of a defective machine, 1,000 units were not produced correctly and remain in inventory. Each of the defective unit has the following costs assigned to it by the company's absorption costing system:

Direct materials	$5.00 per unit
Direct labor	$3.00 per unit
Variable Overhead	$2.5 per unit
Fixed Overhead	$0.25 per unit

The company has two options regarding the defective units: (1) be sold for $8 per unit, or (2) repaired and sold at the regular price.

(Q.) What is the maximum cost of repair per unit in order for the company to choose option (2)?

(A.) $  per unit

Answer 1

Option 1	Sell the defective units at $ 8 per units
	Revenue	=	$     8,000	(1000*8)

Option 2
Defective units - 1000 units
Direct materials	$    5.00	$     5,000
Direct Labor	$    3.00	$     3,000
Variable overhead	$    2.50	$     2,500
Fixed overhead	$    0.25	$        250
Total cost		$   10,750
Selling price	$ 19.00	$   19,000
Total Profit		$     8,250
Revenue - Option 1		$     8,000
Difference - Repair cost to be spend		$        250
Repair cost per unit	=	$        250
		1000
	=	$       0.25	per unit

maximum cost of repair per unit in order for the company to choose option (2) - $ 0.25 per unit