Respuesta :
The scrap or rework analysis of income effects is a $17400 loss.
Garcia should sell the units as scrap
What is the rework?
After inspection, rework is the process of correcting defective, failed, or nonconforming items. This procedure entails disassembling, repairing, replacing, and reassembling. The income effect is the change in consumer spending based on income. This means that if their income rises, consumers will generally spend more. If their income falls, they may spend less. The effect has no bearing on the types of goods that consumers will purchase.
Scrap or Rework Analysis
Scrap (A) Rework (B)
Revenue from scrapped $34,500 $71,100
(-) cost of reworked units $0 $54,000
Income $34,500 $17,100
Incremental income (B-A)
= $17,100 - $34,500
= ($17,400) (loss)
(b). The company should sell the units as scrap since selling these units as scrap generates higher profit than after reworking.
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Complete question
Garcia Company has 11,500 units of its product that were produced at a cost of $172,500. The units were damaged in a rainstorm. Garcia can sell the units as scrap for $34,500, or it can rework the units at a cost of $54,000 and then sell them for $71,100.
(a) Prepare a scrap or rework analysis of income effects.
(b) Should Garcia sell the units as scrap or rework them and then sell them?
