Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 12,000 defective units that cost $5.30 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.50 each. If the units are sold as is, the company will also be able to build 12,000 replacement units at a cost of $5.30 each, and sell them at the full price of $9.50 each.

   

(1)	What is the incremental income from selling the units as scrap? (Omit the "$" sign in your response.)

   

Incremental income

$

   

(2)	What is the incremental income from reworking and selling the units? (Omit the "$" sign in your response.)

   

Incremental income

$

   

(3)	What must the company decide?
	The units should not be reworked The units should be reworked

Answer 1

Answer -

1. Answer -

Incremental income = $30000

2. Answer -

Incremental income = $21600

Calculation:

Sales of scrap units = 12000 units * $2.50 = $30000

Sales of reworked units = 12000 units * $9.50 = $114000

Cost to rework units = 12000 units * $3.50 = $42000

If the units are sold as is, the company will also be able to build 12000 replacement units at a cost of $5.30 each, and sell them at the full price of $9.50 each.

So,

Opportunity cost per unit = Sale of rework unit - Replacement cost per unit

Opportunity cost per unit = $9.50 - $5.30 = $4.20

Then,

Opportunity cost of not making new units = 12000 units * $4.20 = $50400

Therefore,

	Sale as scrap	Rework
Sales of Scrap units	$30000
Sales of rework units		$114000
Cost to rework units		($42000)
Opportunity cost of not making new units		($50400)
Incremental income	$30000	$21600

3. Answer -

The units should not be reworked.

Here, incremental income is $30000 when defective units sales as scrap and incremental income is $21600 when defective units reworked. So, company should sell the units as scrap.