A Company Has the Choice of Either Selling 1,000 Defective

question 57

Multiple Choice

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. If the company rebuilds the units, rather than selling them as scrap, what is the incremental impact on income?

• A) Income will increase by $8,000.
• B) Income will decrease by $500.
• C) Income will decrease by $4,500.
• D) Income will increase by $4,000.
• E) Income will increase by $500.

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Definitions:

Legal Life

The duration for which an asset is protected or regulated by legal rights, often referring to intellectual property or contractual agreements.

Patent

An exclusive right granted for an invention, which provides the patent holder with protection for the invention from commercial exploitation by others.

Intangible Asset

An asset that lacks physical substance, such as patents, trademarks, goodwill, and copyrights, which can nonetheless provide economic benefits.

Oil Well

A drilling operation focused on extracting petroleum or natural gas from underground reservoirs, usually involving significant exploration and investment.