Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:

Question

Quizplus · Accepted Answer

Correcting the defects and selling the watches at the regular price will earn Gordon a profit of $4.50 per unit ($12.50 selling price - $8 production cost - $5 defect correction cost). This is the best option as it brings in the most profit for the company. Selling the watches to the salvage company will result in a loss of $5 per unit, while scrapping the watches will result in a loss of the entire production cost. Selling the watches as they are will also result in a loss as the selling price is lower than the production cost. Selling only a portion of the watches to the salvage company and repairing the remainder may bring in some profit, but it would be less than correcting all the defects and selling the watches at the regular price.

Gordon Corporation Inadvertently Produced 10,000 Defective Digital Watches