Question

exercise 21.8 (static) sunk costs: scrap or rework decision (lo21-1, lo21-2, lo21-3, lo21-4) road master shocks has 15,000 units of a defective product on hand that cost $80,000 to manufacture. the company can either sell this product as scrap for $6 per unit or it can sell the product for $9 per unit by reworking the units and correcting the defects at a cost of $40,000. prepare a schedule to show the effect of selling the defective units as scrap or rework.

Answer 1

5,000 is the correct answer, the net benefit of selling the reworked units.

Scrap value (15,000*6)  = 90,000

Net proceeds from sale of reworked units (15,000*9) - 40,000 = 95,000

Net benefit of selling the reworked units  5,000

An unrecoverable expense that has already been made is referred to as a sunk cost. Sunk costs, for instance, might include the price of machinery and equipment as well as the cost of the factory's lease for a manufacturing company. Sunk costs are not considered in a sell-or-process-further decision, which is a decision.

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