I am not sure about the toy train industry, but for other industries, the defective product would be returned to the manufacturing supplier and they would either scrap it or use some of its parts in the manufacturing of other products.
Lionel used to have a small gift shop at the HQ - open during hours the layout was open. I do recall seeing some $50 starter set 4-4-2s (this was in the mid-90s), but I didn’t see anything that looked like refurbished. They may blow them out to retailers or just salvage them for parts.
As a big factory a good name in the business is more important then the few bucks they could get from repaired warranty stuff. Just take the hours that someone has to fiddle around with the machine before it works again… I guess they just scrapp it and if it’s a high end locomotive re-use the parts. Every other option is simply too expensive or could harm the name Lionel has built over the years.
I’m in the food industry and we also don’t take chances. Simply bring the “miscalculations” away as animal food keeps up the good name and in the end is less expensive then call it back later. Your name is everything. (but we have to really minimize the miscalculations obviously…)
MTH has a link on their site for refurbished items, however the few times that I have looked it was primarily very high end items which didn’t seem to be discounted that much. [|(]