Mell Co.manufactured 100 personal computers at a cost of $30,000.It can sell them as is for $65,000,or install hard disks in them for $25,000 and sell them for $105,000.The $30,000 original manufacturing cost is:
A)An out-of-pocket cost because it has already been paid.
B)A sunk cost because it is not relevant to the decision.
C)An incremental cost because it is relevant to the decision.
D)A fixed cost because it will remain the same no matter which action is taken.

Question

Quizplus · Accepted Answer

The original manufacturing cost of $30,000 is a sunk cost because it is a past cost that has already been incurred and is not relevant to the decision of whether to sell the computers as is or install hard disks. The relevant costs are the additional cost of $25,000 to install the hard disks and the additional revenue of $40,000 from selling the computers with hard disks. Therefore, the best choice is to install the hard disks and sell the computers for $105,000, which will result in a profit of $50,000 ($105,000 - $25,000 - $30,000).

Mell CoManufactured 100 Personal Computers at a Cost of $30,000