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28 March, 15:07

Signal mistakenly produced 1,000 defective cell phones. The phones cost $65 each to produce. A salvage company will buy the defective phones as they are for $33 each. It would cost Signal $88 per phone to rework the phones. If the phones are reworked, Signal could sell them for $144 each. Signal has excess capacity. Should Signal scrap or rework the phones?

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  1. 28 March, 18:53
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    It is more profitable to continue to rework the phones and sell them.

    Explanation:

    Giving the following information:

    Signal mistakenly produced 1,000 defective cell phones.

    The $65 per phone is a sunk cost. It will remain on both decisions, therefore, we will not take into account to make the decision.

    Sell as it is:

    Income = 33*1,000 = $33,000

    Rework:

    Costs = 88*1,000 = $88,000

    Sales = 144*1,000 = $144,000

    Total gain = $56,000

    It is more profitable to continue to rework the phones and sell them.
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