Ryan Miller Toys manufactured 500 stuffed lobsters that were defective
Ryan Miller Toys manufactured 500 stuffed lobsters that were defective. The manufacturing costs of the lobsters were:
Direct materials .......... $30
Direct labor ........... 24
Variable overhead ......... 10
Fixed overhead .......... 12
The lobsters normally sell for $100. The company can rework the lobsters, which will cost $20 for direct materials, $20 for direct labor, and $2 for variable overhead. In addition, fixed overhead will be applied at the rate of 75 percent of direct labor cost. Alternatively, the company could sell the lobsters “as is” for a selling price of $70.

Required
What should management do to maximize profits?

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