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Exercise 10-4 Scrap or rework LO P2 A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be a) sold as is for $2.00 each, or b) reworked for $4.50 each and then sold for the full price of $8.50 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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Answer:

Sales as scrap $44,000

Rework $88,000

Explanation:

Sale as Scrap Rework

Sales of scrap units(22,000×$2.00)

44,000

Sales of Rework units (22,000×$8.50) 187,000

Costs to Rework units(22,000×$4.50) 99,000

Incremental income/loss

44,000 88,000

The company should should REWORK because it has incremental income of 88,000(187,000-99,000) which is higher than that of SCRAP $44,000

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