Question

Z-Tech mistakenly produced 10,000 defective cell phones. The phones cost $60 each to produce. A salvage company will buy the defective phones as they are for $30 each. It would cost Z-Tech $80 per phone to rework the phones. If the phones are reworked, Z-Tech could sell them for $125 each. Compute the incremental net profit from reworking the phones. (Omit the "$" sign in your response.)

  

Incremental net profit

$

Answer 1

Solution

Z-Tech

	Scrap	Rework
Sales	$300,000	$1,250,000
rework costs	-	$800,000
total net income	$300,000	$450,000
increase in net income		$150,000

Hence, incremental net profit from reworking the phones = $150,000

Note: The cost to produce each phone, $60 is not relevant as this a sunk cost.

Computations:

Incremental revenue = selling price per unit for each reworked phone – salvage value per unit when sold as they are

Selling price per unit for each reworked phone = $125

Salvage value per unit = $30

Incremental revenue = $125 - $30 = $95

Incremental net income = (incremental revenue – incremental cost per unit to rework) x number of units

Incremental net income = (95 – 80) x 10,000 = $150,000