Chang Industries has 2,000 defective units of product that already cost $14 each to produce.A salvage company will purchase the defective units as is for $5 each.Chang's production manager reports that the defects can be corrected for $6 per unit,enabling them to be sold at their regular market price of $21.The $14 per unit is a:
A)Incremental cost.
B)Sunk cost.
C)Out-of-pocket cost.
D)Opportunity cost.
E)Period cost.

Question

Quizplus · Accepted Answer

The $14 cost to produce the defective units is a sunk cost because it is a cost that has already been incurred and cannot be recovered. The decision to sell or repair the units should be based on incremental costs, which is the cost difference between the current situation and the alternatives (in this case, selling the units for $5 or repairing them for $6 and selling for $21).

Chang Industries Has 2,000 Defective Units of Product That Already