A company must decide between scrapping or reworking units that do not pass inspection. The company has 44,000 defective units that have already cost $264,000 to manufacture. The units can be sold as scrap for $156,000 or reworked for $198,000 and then sold for $374,000. If the company decides to rework the units, incremental income equals:

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anthougo anthougo · Answer 1 · 2022-04-07T09:51:01+02:00

If the company decides to rework the units, its incremental income equals $20,000.

Incremental income represents the additional income gained after taking a decision, e.g. rework.

For instance, when this company reworks the units, it reduces its loss from $108,000 if the units were sold as scrap to $88,000.

Thus, the incremental income is the difference between $108,000 and $88,000 loss.

Defective units = 44,000

Cost of defective units = $264,000

Scrap value of defective units = $156,000

Cost of rework = $198,000

Sales value after rework = $374,000

Incremental income after rework =

Loss when sold as scrap = $108,000 ($264,000 - $156,000)

Loss when sold after rework = $88,000 ($374,000 - $264,000 - $198,000)

Incremental income after rework = $20,000 ($108,000 - $88,000)

Thus, if the company decides to rework the units, its incremental income equals $20,000.

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