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13 December, 18:43

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is

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  1. 13 December, 21:26
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    If the company decides to rework the units, net income will increase by $20,000.

    Explanation:

    Giving the following information:

    Units = 2,000

    A salvage company will purchase the defective units as they are for $5 each.

    Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.

    The firsts costs incurred are sunk costs, therefore, they are irrelevant. They will remain constant on both decisions.

    Sell as-is:

    Effect on income = 2,000*5 = $10,000

    Rework:

    Effect on income = 2,000 * (21 - 6) = $30,000 increase

    If the company decides to rework the units, net income will increase by $20,000.
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