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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 $5.80 per unit to manufacture. The units can be a) sold as is for $3.00 each, or b) reworked for $4.70 each and then sold for the full price of $8.80 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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Answer:

Explanation:

Defective units = 16000

Cost of manufacture  =92800

When sold as scrap

Revenue = 16000*3= $48000

Net income = $48000

When reworked and sold

Cost of rework = 4.7* 16000= 75200

Revenue =  8.8*16000= 140800

Net income = 65,600

It is better to rework and sell.

Incremental income on reworking and selling is 17,600

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