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 $5.90 per unit to manufacture. The units can be a) sold as is for $3.10 each, or b) reworked for $4.70 each and then sold for the full price of $9.00 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

Answer:

	Sale as Scrap	Rework
Cost to Manufacture 13,000 units ($5.9 per unit)	($76,700)	($76,700)
Sale proceeds (if sold immediately $3.1 per unit)	$40,300	-
Cost for Rework ($4.7 per unit)	-	($61,100)
Sale Proceeds ( After Rework $9 per unit)	-	$117,000
Incremental Income (loss)	($36,400)	($20,800)

The company should Rework on the Defective units as the Loss from them is less if reworked as compared to selling as scrap.