A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units...
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A company with excess capacity must decide between scrapping or reworking units

that do not pass inspection. The company has 16,000 defective units that cost $5.90 per unit to manufacture. The units can be a) sold as is for $3.30 each, or b) reworked for $4.80 each and then sold for the full price of $9.20 each.

 

What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units as scrap or rework them? Q7.PNG

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Incremental income.png

Sale as Scrap
Rework
Opportunity cost of not making new units
Cost of rework units
$16000*$4.80 = $76800
Sales of scrap units
$16000*$3.30 =
$52800
Sales of reworked units
$16000*$9.20 = $147200...

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