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Chang Industries has 2,800 defective units of product that have already cost $14.80 each to produce. A salvage company will purchase the defective units as they are for $5.80 each. Chang's production manager reports that the defects can be corrected for $5.20 per unit, enabling them to be sold at their regular market price of $22.60. The incremental income or loss on reworking the units is:

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Answer:

If the units are rework, income will increase by $32,480 (48,720 - 16,240).

Explanation:

Giving the following information:

The previous cost will not be taken into account, because it is constant for both options.

Number of units= 2,800

Sell as-is:

Selling price= $5.8

Re-work:

Unitary cost= $5.2

Selling price= $22.6

We need to calculate the effect on the income of both options:

Sell as-is:

Effect on income= 2,800*5.8= $16,240 increase

Re-work:

Effect on income= 2,800*(22.6 - 5,2)

Effect on income= $48,720 increase

If the units are rework, income will increase by $32,480 (48,720 - 16,240).

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