Question

5,000 products manufactured by Pete Blue Inc. does not comply with quality control. The cost of each product is $35 per unit. The 5,000 units can be sold in the low-cost Asian Market for $38 per unit or can be reworked to pass quality inspection and sold in USA at the regular price of $60 per unit. Reworking the units will cost $19 per unit but will prevent the production of 5,000 new units. What should Pete Blue Inc will do?

Select one:

Rework the products and earn $41 per unit

Sell the products in the low-cost Asian Market and earn $3 per unit

Sell the products in the low-cost Asian Market and earn $44 per unit

Sell the products in the low-cost Asian Market and earn $38 per unit

Rework the products and earn $44 per unit Rework the products and earn $16 per unit

Answer 1

Let us calculated incremental advantage (disadvantage) of reworking the products
Incremental revenue [ (60-38)*5000 ]	110000
(-) Incremental cost [ 19*5000 ]	95000
(-) Contribution margin lost on new units [ (60-35)*5000 ]	125000
Disadvantage of reworking the products	-110000

As there a disadvantage in rewoking the units, we should sell them in low-cost Asian Market and earn $3 per unit

Answer : Sell the products in the low-cost Asian Market and earn $3 per unit