Question

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: Multiple Choice Incremental cost. Sunk cost. Out-of-pocket cost. Opportunity cost. Period cost.

Answer 1

The $14 per unit production cost at Chang Industries is a sunk cost. This means it is a historical cost that has already occurred and should not affect the company's current decision-making on whether to sell or repair the defective units.

Step-by-step explanation:

The $14 per unit production cost at Chang Industries for the defective products is a sunk cost. A sunk cost is a cost that has already been incurred and cannot be recovered. It should not influence the company's future business decisions. As Chang Industries decides between selling the defective products as-is to a salvage company or repairing them to sell at the regular market price, the original production cost serves just as a reference point for past expenditures, not as a factor in the marginal analysis of what to do next.

In accounting, recognizing sunk costs helps businesses avoid the sunk cost fallacy, which might otherwise prompt them to make decisions based on costs that will not change the outcome of current or future actions. Instead, Chang Industries should consider the additional cost of repairing the units ($6 per unit) versus the potential increase in revenue from selling the products at their full market price ($21 per unit), compared to the salvage company's offer of $5 per unit as is.

Answer 2

Sunk cost

Step-by-step explanation:

-Incremental cost is the total cost of producing an additional unit.

-Sunk cost is a cost that has already been paid and that it is not possible to get it back.

-Out-of-pocket cost is a cost that requires a direct payment in the actual period.

-Opportunity cost is the cost of not receiving a benefit when you choose an alernative over another one.

-Period cost is a cost that is not associated with the production of goods.

According to this, the answer is that the $14 per unit is a sunk cost because the company has already spent that manufacturing the products and it is not able to recover that money.