Signal mistakenly produced 1,000 defective cell phones. The phones cost $60 each to produce. A salvage company will buy the defective phones as they are for $30 each. It would cost Signal $80 per phone to rework the phones. If the phones are reworked, Signal could sell them for $120 each. Signal has excess capacity. Should Signal scrap or rework the phones

Signal Company

Signal should rework the phones with its excess capacity.  Reworking reduces its loss by $10,000 (or $10 per phone).

Explanation:

a) Data and Calculations:

Number of defective cell phones produced = 1,000

Cost of production per phone = $60

Salvage value per phone = $30

Additional rework cost per phone = $80

Selling price after reworking per phone = $120

Differential Analysis:

                                     Scrap         Rework       Difference

Sales revenue          $30,000      $120,000       $90,000

Cost of production    60,000         140,000         80,000

Loss                         $30,000        $20,000        $10,000

Per unit calculations:

                                     Scrap         Rework       Difference

Sales revenue              $30              $120              $90

Cost of production        60                 140                80

Loss                             $30                $20              $10

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