Mega Manufacturing has defective inventory on hand, which cost $27,000 to manufacture. The company can sell the defective inventory as is for $18,000 or rework the units at a cost of $12,000 and sell the inventory for $26,000. The sunk cost and the opportunity cost of selling the inventory as is (rather than rework the units) are: Sunk Cost Opportunity Cost

Question

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The sunk cost is the $27,000 already spent on manufacturing the defective inventory and cannot be recovered. The opportunity cost is the potential profit forgone by choosing to sell the inventory as is instead of reworking it. Therefore, the opportunity cost is the difference in profits between the two options, which is $26,000 - $18,000 = $8,000. Since the cost of reworking the units is $12,000, reworking them would result in a loss of $4,000 ($8,000 - $12,000). Selling the inventory as is would minimize the losses, as the company would only lose the sunk cost of $27,000. Therefore, the best choice is to sell the inventory as is.

Mega Manufacturing Has Defective Inventory on Hand, Which Cost $27,000