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

Question

Paxton Jacobs

Business

28 December, 19:59

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

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Jean · Answer 1

If the company decides to rework the units, net income will increase by $20,000.

Explanation:

Giving the following information:

Units = 2,000

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 firsts costs incurred are sunk costs, therefore, they are irrelevant. They will remain constant on both decisions.

Sell as-is:

Effect on income = 2,000*5 = $10,000

Rework:

Effect on income = 2,000 * (21 - 6) = $30,000 increase

If the company decides to rework the units, net income will increase by $20,000.