A company has the choice of either selling 500 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $7.00 per unit. Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3.00 per unit for labor, and $1.00 per unit for overhead, and then sell the rebuilt units for $15.00 each. What should the company do?

Question

Quizplus · Accepted Answer

Rebuilding the units would result in a profit of $9.00 per unit ($15.00 selling price - $2.00 materials - $3.00 labor - $1.00 overhead = $9.00 profit). Selling the units as scrap would result in a loss of $7.00 per unit ($7.00 selling price - $0.00 incremental costs = -$7.00 loss). Therefore, the company should rebuild the units to make a profit of $4,500 ($9.00 profit per unit x 500 units).

A Company Has the Choice of Either Selling 500 Defective