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) It does not matter because both alternatives have the same result.
B) Rebuild the units.
C) Sell the units as scrap.
D) Since both alternatives produce a loss, store the units in hopes of a better price later.
E) Scrap the units.

Question

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) It does not matter because both alternatives have the same result.
B) Rebuild the units.
C) Sell the units as scrap.
D) Since both alternatives produce a loss, store the units in hopes of a better price later.
E) Scrap the units.

Quizplus · Accepted Answer

Rebuilding the defective units would cost $2.40 ($0.60 for materials + $1.00 for labor + $0.80 for overhead) per unit. But selling the rebuilt units would bring in $5.00 per unit. So, the company would make a profit of $2.60 per unit ($5.00 - $2.40). Therefore, it is better to rebuild the units than to sell them as scrap.

A Company Has the Choice of Either Selling 600 Defective