Question

Outputs with a negative sales value are:

A. added to cost of goods sold.
B. added to joint production costs and allocated to joint or main products.
C. added to joint production costs and allocated to byproducts and scrap.
D. subtracted from product revenue.

Answer 1

Outputs with negative sales values should be subtracted from product revenue to calculate net income accurately. It is especially important when marginal costs exceed the selling price, suggesting the need for production adjustments. The correct answer is option D.

Step-by-step explanation:

When addressing the treatment of outputs with a negative sales value, option D is the most appropriate. These values should be subtracted from product revenue. This concept is essential in understanding a business's profitability. Negative sales values typically indicate refunds, returns, or discounts and need to be accounted for to comprehend the net income accurately. For example, if a firm has total revenues of $125 (from selling five units at $25/unit) and total costs of $130 for those units, the firm experiences a negative profit (loss) of $5. This reflects an average cost of $26/unit, which is higher than the selling price, causing a loss of $1 per unit produced. Moreover, if the marginal costs ($30/unit) exceed the price ($25/unit), each additional unit produced will only increase the losses, suggesting that the firm should reconsider its production levels.