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17 September, 08:40

Chang Industries has 2,700 defective units of product that have already cost $14.70 each to produce. A salvage company will purchase the defective units as they are for $5.70 each. Chang's production manager reports that the defects can be corrected for $5.30 per unit, enabling them to be sold at their regular market price of $22.40. The incremental income or loss on reworking the units is:A. $45,090 income. B. $30,780 loss. C. $46,170 income. D. $14,310 loss. E. $30,780 income.

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  1. 17 September, 09:34
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    Option (E) is correct.

    Explanation:

    The company is left with two options:

    selling the defective units at a price = $5.7 each or

    Reworking on the defective units that will incur an additional cost = $5.3 and

    selling them at 22.4

    If the company goes for reworking the defective units it will incur a cost of $5.3 for 2700 units.

    Apart from this the company needs to bear the cost of not selling the defective units at a price of $5.7 each.

    Total incremental cost:

    = ($5.3 + $5.7)

    = $11 * 2700

    = $29,700

    Total revenue generated from selling the units:

    = Regular market price * Defective units

    = $22.4 * 2,700

    = 60,480

    Total incremental Income:

    = Total revenue generated from selling the units - Total incremental cost

    = $60,480 - $29,700

    = $30,780

    Therefore, the incremental income on reworking the units is $30,780.
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