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A company must decide between scrapping or reworking units that do not pass inspection. The company...

A company must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be sold as is for $2.00 each, or they can be reworked for $4.50 each and then sold for the full price of $8.50 each. If the units are sold as is, the company will be able to build 22,000 replacement units at a cost of $6 each, and sell them at the full price of $8.50 each.

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? (Enter costs and losses as negative values.)

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Answer #1
Sale as Scrap Rework
Sales of scrap units 44000
Sales of reworked units 187000
Cost to rework units (99000)
Opportunity cost of not making new units (55000)
Incremental income (loss) 44000 33000
The company should: sell as is
Workings:
Sales of scrap units =22000*2
Sales of reworked units =22000*8.5
Cost to rework units =22000*4.5
Opportunity cost of not making new units =22000*(8.5-6)
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