Question

Signal mistakenly produced 1,150 defective cell phones. The phones cost $64 each to produce. A salvage company will buy the defective phones as they are for $31 each. It would cost Signal $82 per phone to rework the phones. If the phones are reworked, Signal could sell them for $150 each. Assume there is no opportunity cost associated with reworking the phones. Compute the incremental net income from reworking the phones.

Answer 1

	Scrap	Rework
Sales (a)	$35,650 [1,150 units x $31]	$172,500 [1,150 units x 150]
Reworks cost (b)		($94,300) [1,150 units x 82]
Income (a - b)	$35,650	$78,200
Increase net income by	$42,550 [$78,200 - $35,650]

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Alternative answer:

Sales revenue from sale of defective units = 1,150 units x $31 per unit = $35,650

Sales revenue from the sale of units after rework is done = 1,150 units x $150 per unit = $172,500

Incremental revenue = $172,500 - $35,650 = $136,850

Incremental cost = 1,150 units x $82 per unit = $94,300

Incremental net income = Incremental revenue - Incremenal cost = $136,850 - $94,300 = $42,550