A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 22,000 defective units that cost $6 per unit to manufacture. The units can be a) sold as is for $2.00 each, or b) reworked for $4.50 each and then sold for the full price of $8.50 each. What is the incremental income from selling the units as scrap and reworking and selling the units

Incremental income is $44,000

Explanation:

The incremental income of reworking as against the selling off as scrapped units is computed below.It is important that by not selling off the defective units as scrap,the sales revenue that could have been derived from scrap sale is lost,hence it is an opportunity cost that should be deducted from sales revenue recorded under the new arrangement.

Sales price   of rework                              $8.50

less:opportunity cost of rework               ($2)

incremental sales price                              $6.50

incremental sales revenue($6.5*22,000)  $143,000

incremental cost of rework($4.5*22,000) ($99,000)

incremental net income                              $44,000

No doubt that the incremental net income of reworking the defective units is $44,000 over and above what is realizable if the defective were scrapped

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