Question

Cung Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

Answer 1

Answer:

$(700)

Explanation:

in  determining the incremental effect, we need to compare the current scrap value (without rework) with the net realizable value after rework.  

Net Realizable Value (After Rework) = Sales Value - Cost of Rework

Using the values provided in the question, we get,

Net Realizable Value (After Rework) = 30,800 - 1,400 = $29,400

If the material is sold as it is, the company would realize $30,100.

Therefore, selling after rework would result in an incremental loss of $700 l.e (29,400 - 30,100).