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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 $5.20 per unit to manufacture. The units can be a) sold as is for $2.80 each, or b) reworked for $4.80 each and then sold for the full price of $8.00 each.

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Answer:

If the company reworks the units, income will increase by $6,400 (compare to sell them as-is).

Explanation:

Giving the following information:

The company has 16,000 defective units.

We will not take into account the original cost of the units. It is irrelevant to the decision making. It will remain constant in both options.

Option A:

Effect on income= 16,000*2.8= $44,800

Option B:

Effect on income= 16,000*(8 - 4.8)

Effect on income= $51,200

If the company reworks the units, income will increase by $6,400 (compare to sell them as-is).

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