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31 May, 02:24

A company must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.20 per unit to manufacture. The units can be sold as is for $3.00 each, or they can be reworked for $5.00 each and then sold for the full price of $8.20 each. If the units are sold as is, the company will be able to build 13,000 replacement units at a cost of $5.20 each, and sell them at the full price of $8.20 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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  1. 31 May, 02:25
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    Answer: $67,600 and $2600

    Explanation:

    Total unit = 13,000

    Defective unit cost = $5.20

    Resale price = $3.00

    Reworked = $5.00

    Full price = $8.20

    Opportunity cost

    = Full price - replacement unit

    = 8.20 - 5.20

    = 3.00

    =. Cost of reselling

    = 13,000 * 3.00

    = $39,000

    1. Cost of defective units

    = 13,000 * 5.20

    = $67,600

    2. Cost of reworked

    = $5.00 * 13,000

    = $65,000

    3. Full price

    = 13,000 * $8.20

    = $106,600

    B. Incremental income of selling the unit as scrap and reworked

    Scarp = $67, 600

    Reworked = $ (106600 - 39, 000 - 65,000)

    = $2600
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