Camino Jet Engines Corporation (Continued)

The company built eight (8) CJE-27 jet engines to satisfy a special order. Upon inspection, the engines were determined to be defective. The company now must decide between scrapping these engines or reworking them to meet the specifications of the buyer. Each engine cost $650,000 per unit to manufacture. The engines can be sold as scrap (spare parts) for $325,000 each or they can be reworked for $350,000 each and sold for the full price of $1,100,000 each. If the defective engines are scrapped, the company could build 8 more engines to satisfy the special order. The new engines could then be sold at the full price. If the company chose to rework, it would not be able to build the new engines.

Required:

1. Calculate the incremental income from selling the engines as scrap.
2. Calculate the relevant benefits and relevant costs for reworking and selling the units, including opportunity costs.
3. Decide whether the company should scrap or rework the engines.
4. Explain your reasoning and show your calculations.