Question

A company must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $6.10 per unit to manufacture. The units can be sold as is for $3.20 each, or they can be reworked for $4.60 each and then sold for the full price of $9.30 each. If the units are sold as is, the company will be able to build 16,000 replacement units at a cost of $6.10 each, and sell them at the full price of $9.30 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.)

Answer 1

Solution -

Units (A) Rate (B) In $ Amount (A-B) In$ Particulars Sale of Scrap Sale of reworked units Opportunity cost (1) Cost to rework units 16000 3.2 51200 16000 9.3 148800 16000 3.2 51200 16000 4.6 73600 The opportunity cost ($3.20) is the difference between sale of rework units ($9.30)and replacemnt cost ($6.10) Particulars Sales of scrap units Sales of reworked units Opportunity cost of not making new units Cost to rework units Incremental Income Sale as scrap(Rework (In $) 51200 148800 -51200 73600 51200 24000