Question

S 23-9 Scrap or rework LO A1 Signal mistakenly produced 1,300 defective cell phones. The phones cost $70 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $86 per phone to rework the phones. If the phones are reworked, Signal could sell them for $142 each. Assume there is no opportunity cost associated with reworking the phones. Compute the incremental net income from reworking the phones. Scrap Rework Sales Rework costs Total

Answer 1

	Scrap	Rework
Sales	$ 42,900	$ 184,600
Rework Costs	-	111,800
Total	$ 42,900	$ 72,800

Incremental net income from reworking the phones : $ 72,800 - $ 42,900 = $ 29,900.

The cost of $ 70 for producing the cell phones is a sunk (unavoidable) cost, and hence is not relevant.