A Company Must Decide Between Scrapping or Rebuilding Units That

question 76

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 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:
a.What is the net return from selling the units as scrap?
b.What is the net return from reworking and selling the units?
c.Should the company sell the units as scrap or rework them?

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Definitions:

Degree of Uncertainty

A measure or assessment of the unpredictability or risk associated with a decision, project, or future event.

Human Capital

The combined abilities, expertise, and non-physical resources of people that contribute to producing economic benefits for themselves, their places of work, or their local area.

Simulation

A blend of qualitative and quantitative modelling that incorporates a set of assumptions about relationships among variables in a mathematical algorithm. Simulation can simultaneously model demand and supply, and is very useful for testing the impact of assumptions on the outcome of the model.

Bottlenecks

Points in a process where the flow is impaired or stopped entirely, leading to delays and reduced efficiency.