Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.
-Chang should:
A) Sell the units to the salvage company for $5 per unit.
B) Scrap the units.
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
D) Correct the defects and sell the units at the regular price.
E) Sell 1,000 units to the salvage company and repair the remainder.

Question

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. 
-Chang should:
A) Sell the units to the salvage company for $5 per unit.
B) Scrap the units.
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
D) Correct the defects and sell the units at the regular price.
E) Sell 1,000 units to the salvage company and repair the remainder.

Quizplus · Accepted Answer

The best choice for Chang Industries is to correct the defects and sell the units at the regular price. Although the salvage company is offering to purchase the defective units for $5 each, repairing the defects and selling the units for $21 each will result in a greater profit for Chang Industries. The cost to repair the units is $6 per unit, resulting in a total cost of $20 per unit ($14 initial cost + $6 repair cost). This means that selling the corrected units for $21 each will result in a profit of $1 per unit. On the other hand, selling the units as they are to the salvage company will result in a loss of $9 per unit ($14 initial cost - $5 salvage price). Therefore, correcting the defects and selling the units at the regular price is the best choice for Chang Industries.

Chang Industries Has 2,000 Defective Units of Product That Have