Chang Industries has 1,400 defective units of product that have already cost $13.40 each to produce. A salvage company will purchase the defective units as they are for $4.40 each. Chang's production manager reports that the defects can be corrected for $6.60 per unit, enabling them to be sold at their regular market price of $19.80. The incremental income or loss on reworking the units is: a. $12,320 loss.
b. $12,320 income.
c. $9,240 loss.
d. $21,560 income.
e. $18,480 income.

If the company reworks the units, income will increase by $12,320 compared to sell them as-is.

Explanation:

Giving the following information:

The initial cost will not be taken into account.

Sell as-is:

Number of units= 1,400

Selling price= $4.4

Rework:

Number of untis= 1,400

UNitary cost= $6.6

Selling price= $19.8

Now, we can calculate the effect on the income of both options:

Sell as-is:

Effect on income= 1,400*4.4= $6,160

Rework:

Effect on income= 1,400*(19.8 - 6.6)

Effect on income= $18,480

If the company reworks the units, income will increase by $12,320 compared to sell them as-is.