An employee of A/C Corporation has found some partially completed units of Model

Question

An employee of A/C Corporation has found some partially completed units of Model X in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $850 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a scrap metal dealer. If A/C Corporation spends $285 to complete the units, they could be sold for $600.

(a)     What should A/C Corporation do? Why?

(b)     Identify the sunk cost, if any.

Explanation / Answer

Income if scrapped = 275

Income if work is done and sold at higher price = 600 - 285 = 315

Since the net income is higher in the second alternative, A/c Corporation should rework on the scrap and sell it at a higher price

Sunk costs are costs that have already been incurred and are not considered relevant for decision making

In the above example the original cost of 850 is a sunk cost

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