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A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 16,000 defective units that cost $5.50 per unit to manufacture. The units can be a) sold as is for $3.10 each, or b) reworked for $4.50 each and then sold for the full price of $8.60 each. What is the incremental income from selling the units as scrap and reworking and selling the units

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Answer and Explanation:

The computation of the incremental income is as follows;

Particulars                             Sale as scrap     Rework

Sales of reworked units

(16,000 × $8.60)                                             $137,600

Sales of scrap units

(16,000 × $3.10)                       $49,600

Cost to rework units

(16,000 × $4.50)                                              ($72,000)

Incremental income (loss)      $49,600            $65,600

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