25 . Y Corporation produced 10,000 defective radios. The radios cost $8 each. A salvage company will pay $3 each for the defective radios. Y's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular price of $12.50 each. Y should: Question 25 options: A. Sell the units to the salvage company for $3 per unit. B. Correct the defects and sell the radios at the regular price. C. Sell the radios at $3 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. Do something else.

The correct option would be option B which states that, Correct the defects and sell the radios at the regular price.

Explanation:

In this question, we are asked to find out the best possible answer or solution for the company to use and explain the reason behind it as well.

Solution:

The correct option would be option B which states that, Correct the defects and sell the radios at the regular price.

Reasoning:

Data Given:

10,000 defective radios

Cost of radio = $8

Salvage company will pay = $3 for each.

Defect can be correct at = $5 each

Selling price after correcting the defects = $12.50

So,

Radio cost is sunk as it has been already incurred - $8

Now, there are only two options left:

1. Sell the radios at salvage company for = $3

Loss = 8-3 = $5 each = 10,000 x 5$ = $50,000

or

2. Correct the radios and sell at the regular price.

Incremental revenue = $12.50

Incremental Cost = $5.00

Incremental Contribution = 12.50 - 5.00 =  $7.50

Loss = 8 - 7.50 = $0.50 each  = 10,000 x 0.50 = $5000

Company will save $45000 losses if decides to choose B as the correct strategy.

Hence, option B is correct.  

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