Question

A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.90 per unit to manufacture. The units can be a) sold as is for $2.90 each, or b) reworked for $4.60 each and then sold for the full price of $8.80 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) The company should:

Answer 1

	Sale as Scrap	Rework
Sales price	$2.90	$8.80
Cost to manufacture defective units	$5.90	$5.90
Cost to rework	$0.00	$4.60
Profit/(Loss) per unit	-$3.00	-$1.70
Incremental Income	$1.30
Since there is an incremental income of $1.30 per unit to rework, hence the company should rework