A company employs a process costing system for its two-department manufacturing operation using the first-in-first-out (FIFO) inventory method.  When units are completed in department 1, they are transferred to department 2 for completion.  Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion.  The specific identification method is used to account for lost units.

Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected.  Defective units have minimal value, and the company sells them without any further processing for whatever it can.  Generally the amount collected equals, or slightly exceeds, the transportation cost.  A summary of the manufacturing activity for department 2, in units for the current month, is presented below.

The units that failed inspection during the current month would be classified as

A. Abnormal spoilage.

B. Normal scrap.

C. Normal reworked units.

D. Abnormal waste.

In order to be classified as abnormal spoilage, the amount of spoilage has to exceed the normal limit.  In this case, the normal limit is 4% of units inspected which would have been an upper limit of 7,800 units (195,000 Ã— .04); the 5,000 defective units are well under the tolerance limit for normal spoilage.

The correct answer is normal scrap. My question is how to calculate the upper limit. I think it should be  200,000 Ã— .04 instead of 195,000 Ã— .04