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:

Legal Transfer

Legal transfer involves the official movement of an asset's title or right from one party to another according to established legal processes.

Ownership

The legal right to possess, use, and dispose of something, whether it be tangible property like land or intangible assets like intellectual property.

Hotel Liability

Hotel Liability concerns the legal responsibility of a hotel for injuries or losses suffered by guests due to the hotel's actions or inactions.

Stolen Television

A television that has been illegally taken from its rightful owner without permission.