Patrick Corporation inadvertently produced 10,000 defective personal radios. The radios cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Patrick's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Patrick should:
A) Sell the radios for $3 per unit.
B) Correct the defects and sell the radios at the regular price.
C) Sell the radios as they are because repairing them will cause their total cost to exceed their selling price.
D) Sell 5,000 radios to the salvage company and repair the remainder.
E) Throw the radios away.

Question

Quizplus · Accepted Answer

If Patrick Corporation corrects the defects for $5 per unit, they can sell the radios at the regular market price of $12.50, which would result in a profit of $12.50 - $5 - $8 = -$0.50 per unit. This means they would be losing money on each radio sold. However, if they sell the defective radios to the salvage company at $3 each, they would be able to recover some of the costs and minimize their losses. Therefore, the best choice is to correct the defects and sell the radios at the regular price.

Patrick Corporation Inadvertently Produced 10,000 Defective Personal Radios