A Company Must Decide Between Scrapping or Rebuilding Units That

question 17

Essay

A company must decide between scrapping or rebuilding units that do not pass inspection. The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to satisfy a special order, which must still be satisfied if the defective units are scrapped. The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000 replacement units and sell them at the full price.
Required:
(1) What is the net return from selling the units as scrap?
(2) What is the net return from reworking and selling the units?
(3) Should the company sell the units as scrap or rework them?

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Definitions:

Fixed-Alternative Questions

Questions used in surveys or polls that offer a set number of specific options for respondents to choose from.

Scale

The size or level of something, especially in terms of the scope or extent of production, operation, or action.

Closed-End Question

A type of question designed to receive a specific, limited response, often "yes" or "no", from a given set of options.

Fixed-Alternative

A type of question format in surveys or questionnaires that presents a limited set of answer options from which respondents must choose.