Question

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What should the company do

Answer 1

Answer: The company must rebuild the units.

Explanation: We must compare the benefits obtained by selling the defective units with the benefits obtained by selling the reconstructed units.

If we sell the defective units: 600 units × $2 = $1200

Versus

If we sell the rebuilt units: 600 units x ($5 - $0.60 [Materials] - $1 [Labor] - $0.80 [Overhead]) =

= 600 x ($2,60) = $1560.

Then it is convenient to rebuild the defective units to obtain a greater benefit.