Question

chang industries has 2,800 defective units of product that already cost $30 each to produce. a salvage company will purchase the defective units as is for $13 each. chang's production manager reports that the defects can be corrected for $22 per unit, enabling them to be sold at their regular market price of $29. the $30 per unit is a_____

Answer 1

The $30 per unit cost is a sunk cost. Sunk costs are historical costs that have already been incurred and cannot be recovered.

The $30 per unit cost for the defective units in Chang Industries constitutes a sunk cost, as it reflects historical expenses that cannot be recovered. In deciding whether to sell the units as is or incur additional correction costs, the $30 is irrelevant to future considerations.

The salvage value and correction cost, along with potential revenue from selling corrected units, are more pertinent factors for evaluating the most economically sound decision. Recognizing sunk costs as non-recoverable guides effective decision-making, focusing on prospective outcomes rather than past expenditures in business strategies.