The Wasson Widget Co. has 1,000 obsolete widgets on hand. These units were produced a year ago at a cost of $10,000. The units could be scrapped for $1,000 or reworked for $2,000 and sold for $5,000. Which alternative is desirable and why?
A) Scrap, income of $1,000 is higher than the other option
B) Rework, incremental loss $7,000
C) Rework, income of $3,000 is higher than the other option
D) Scrap, incremental loss $9,000

Question

Quizplus · Accepted Answer

If the units are scrapped, the company will receive $1,000. However, if the units are reworked, the company will have to spend an additional $2,000, making the total cost of the units $12,000. If the reworked units are sold for $5,000 each, the company will generate revenue of $5,000,000.

To determine which option is desirable, we need to compare the income generated by each option.

Income from scrapping units: $1,000

Income from reworking and selling units: $5,000 x 1,000 = $5,000,000

The income generated from reworking and selling the units is significantly higher than the income generated from scrapping them. Therefore, reworking and selling the units is the best choice.