Question

Chang Industries has 2,200 defective units of product that already cost $18 each to produce. A salvage company will purchase the defective units as is for $7 each. Chang's production manager reports that the defects can be corrected for $10 per unit, enabling them to be sold at their regular market price of $23. The $18 per unit is a:

Answer 1

Answer:

The $18 per unit is a:

sunk cost.

Explanation:

Chang's cost incurred per unit of $18 is a sunk cost.  A sunk cost is a cost that has already been incurred.  It does not make a difference in a future decision. This implies the Chang may decide to correct the defect or otherwise.  What decision it takes should be based on the cost and revenue that results from the next decision, and not the past decision.