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30 August, 15:28

Stooge Enterprises manufactures ceiling fans that normally sell for $93 each. There are 340 defective fans in inventory, which cost $59 each to manufacture. These defective units can be sold as is for $23 each, or they can be processed further for a cost of $41 each and then sold for the normal selling price. Stooge Enterprises would be better off by a

A. $9,860 net increase in operating income if the ceiling fans are repaired.

B. $23,800 net increase in operating income if the ceiling fans are sold as is.

C. $23,800 net increase in operating income if the ceiling fans are repaired.

D. $9,860 net increase in operating income if the ceiling fans are sold as is.

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Answers (1)
  1. 30 August, 16:09
    0
    A. $9,860 net increase in operating income if the ceiling fans are repaired.

    Explanation:

    If the company don't do anything with defective fans, they still occurs manufacturing cost of $20,060 (=$59 * 340)

    (1) if the company sell defective units, operating income is - 12,240 or loss of $12,240 = (340*$23-$20,060)

    (2) if the company process further for a cost of $41 each and then sell for the normal selling price, the operating income is - 2,380 loss of $2,380 = 340 * ($93-$41) - $20,060

    So if the fans are repaired, the net increase in operation income is $9,860 = (-2,380 - (-12,240))
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