A company has the choice of either selling 600 defective units as scrap or rebuilding them.The company could sell the defective units as they are for $2.00 per unit.Alternatively,it could rebuild them with incremental costs of $0.60 per unit for materials,$1.00 per unit for labor,and $0.80 per unit for overhead,and then sell the rebuilt units for $5.00 each.What should the company do?
A)Sell the units as scrap.
B)Rebuild the units.
C)It does not matter because both alternatives have the same result.
D)Since both alternatives produce a loss,store the units in hopes of a better price later.
E)Throw the units away.

Question

Quizplus · Accepted Answer

To determine whether to sell the defective units as scrap or rebuild them, we need to compare the incremental revenue of each option.

If the company sells the defective units as they are, it will receive a revenue of $2.00 per unit, or $1,200 for all 600 units.

If the company rebuilds the units, it will incur incremental costs of $2.40 per unit ($0.60 for materials, $1.00 for labor, and $0.80 for overhead), or $1,440 for all 600 units. However, it will also receive incremental revenue of $2.00 per unit since it would have thrown them away otherwise, or $1,200 for all 600 units, PLUS an additional revenue of $2.00 ($5.00 - $3.00) per unit for the 600 rebuilt units, or $1,200. This translates to a total revenue of $2,400.

Therefore, rebuilding the units would generate a higher total revenue than selling them as scrap. The best choice is to rebuild the units.

A Company Has the Choice of Either Selling 600 Defective