A company with excess capacity 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 a) sold as is for $2.00 each, or b) reworked for $4.50 each and then sold for 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.)

Question

Business

Paul Harper

2 November, 17:33

A company with excess capacity 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 a) sold as is for $2.00 each, or b) reworked for $4.50 each and then sold for 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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Gucci · Answer 1

The company will lose less if the process is continued.

Explanation:

Giving the following information:

The company has 22,000 defective units that cost $6 per unit to manufacture.

The units can be:

a) sold as-is for $2.00 each

b) reworked for $4.50 each and then sold for the full price of $8.50 each.

We need to determine whether it is more convenient to sell as it is or continue processing.

A) Effect on income = 22,000 * (2-6) = - 88,000

B) Effect on income = 22,000 * (8.5 - 6 - 4.5) = - 44,000

The company will lose less if the process is continued.