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.
- The incremental income or loss on reworking the units is:
A) $12,000 loss.
B) $20,000 loss.
C) $32,000 income.
D) $20,000 income.
E) $30,000 income.

Question

Quizplus · Accepted Answer

If Chang Industries sells the defective units without reworking, they will receive $5 per unit, resulting in a total revenue of 2,000 x $5 = $10,000. 
On the other hand, if they rework the units, it will cost them an additional $6 per unit, bringing the total cost per unit to $14 + $6 = $20. 
However, they can sell the reworked units for $21 each, resulting in a revenue of 2,000 x $21 = $42,000. 
Therefore, the incremental income on reworking the units is: 
$42,000 - ($20 x 2,000) - ($6 x 2,000) = $20,000. 
So, the best choice is D, which indicates an incremental income of $20,000 on reworking the units.

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