The quality assurance department has found a defective unit. The cost of this unit was $75 in raw material, labor and overhead. There are now three options available to the organization.
• Scrap the unit
• Sell the defective unit at a reduced price of $40 or
• Rework the product at a cost of $35 and sell the unit for $85
Which one of the following options would be the most cost effective?
A. The item should be scrapped - as rework is a non-value added cost and should be eliminated or kept as low as possible.
B. The item should be sold as a defective unit - because this minimizes the scrap cost to $35 but avoids non-value added rework.
C. The item should be sold as a defective unit - as the total cost of the reworked product would be greater than the selling price.
D. The item should be reworked and sold - despite rework being a non-value added cost, because this leads to the lowest overall cost.
Additional Information
This question belongs to Operations Management and the question discusses about finding a defective unit by quality assurance.