Question

Pepper Corp. makes and sells a product that normally sells for $30. Because of a defective machine, 1,000 units were not produced correctly and remain in inventory. Each of the defective unit has the following costs assigned to it by the company's absorption costing system:

Direct materials	$5.00 per unit
Direct labor	$3.00 per unit
Variable Overhead	$2.25 per unit
Fixed Overhead	$0.5 per unit

The company has two options regarding the defective units: (1) be sold for $8 per unit, or (2) repaired and sold at the regular price.

(Q): What is the maximum cost of repair per unit in order for the company to choose option (2)?

(A): $  per unit

Answer 1

Answer $19.75 per unit

Out of 2 options

Defective units are sold for $8 is not beneficial to the company because the variable cost incurred for the product is $10.25(5+3+2.25), so the loss incurred to choose option is $ 2.25 per unit.

Second option

Repair and sold the product

Good product selling price $ 30

Variable cost $ 10.25

So the company can incurr maximum repair cost

$ 19.75 (30-10.25) in this situation the company neither incurred profit nor loss ( independent situation)

Note: Fixed overhead is a allocation cost, not considered for decision making