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:

Work Effort

The amount of physical or mental energy utilized towards accomplishing a task or objective within a workplace setting.

Team Members

Individuals who are part of a group working together towards a common goal or project, each contributing with their specific roles and responsibilities.

Marginal Revenue

The additional revenue that a firm gains from selling one more unit of a good or service.

Monopoly

A market structure where a single firm or entity exclusively controls the supply of a particular good or service, limiting competition.