Wasson Widget 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, profit of $1,000 is higher than the other option
B) Rework, incremental loss $7,000
C) Rework, profit of $3,000 is higher than the other option
D) Scrap, incremental loss $9,000

Question

Quizplus · Accepted Answer

By reworking the obsolete widgets, Wasson Widget will incur a cost of $2,000 per unit, but will be able to sell them for $5,000 per unit, resulting in a profit of $3,000 per unit. Therefore, reworking all 1,000 units would result in a profit of $3,000,000. On the other hand, if Wasson Widget scraps the units, they would only receive $1,000 for the whole lot, resulting in an incremental loss of $9,000. Therefore, the best choice is to rework the units and sell them for a profit.

Wasson Widget Has 1,000 Obsolete Widgets on Hand