Unformatted text preview: Note 2: 10,000 units at $1.50 per unit customer selling price = $15,000 Note 3: 10,000 units at $0.80 per unit additional rework costs = $8,000 NOT CONSIDERING OPPORTUNITY COSTS, THE COMPANY WOULD DEFINITELY ELECT TO REWORK THE UNITS SINCE THE RETURN IS $7,000 VERSUS $4,000. HOWEVER: Scrap NOW Rework (note 1) (note 2) Sale of defects $4,000 15,000 Less rework costs (note 3) (8,000) Less opportunity costs (note 4) (5,000) KEY STEP Net return $4,000 $2,000 Note 4: 10,000 units at contribution margin of $0.50 each = $5,000. Note that the selling price for the units is $1.50 and the cost to produce them in ordinary operations is $1.00 so the contribution per unit would be $0.50 and by not producing these units the company is giving up $0.50 per unit or $5,000 for the 10,000 units reworked. When you include opportunity costs, then the clear choice is NOT TO REWORK since you are better off simply producing more units and scapping the bad ones....
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- Summer '08
- Accounting, $0.40, $1.00, rework costs, $0.80