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A company must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.50 per unit to manufacture. The units can be sold as is for $3.10 each, or they can be reworked for $4.70 each and then sold for the full price of $8.60 each. If the units are sold as is, the company will be able to build 13,000 replacement units at a cost of $5.50 each, and sell them at the full price of $8.60 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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Answer:

  • Selling as is ⇒ $40,300
  • Reworking and then selling ⇒ $50,700

Explanation:

Incremental income from selling the scrap as is:

= 13,000 units * 3.10

= $40,300

Incremental cost from reworking and then selling:

= Sale of reworked units - Cost of reworking units

= (8.60 * 13,000) - (4.70 * 13,000)

= 111,800 - 61,100

= $50,700

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