Kelly Company has 20,000 units in inventory that had a production cost of $4 per unit.These units cannot be sold through normal channels due to a significant technology change.These units could be reworked at a total cost of $30,000 and sold for $35,000.Another alternative is to sell the units to a junk dealer for $10,500.The relevant cost for Kelly to consider in making its decision is
A)$80,000 of original product costs.
B)$30,000 for reworking the units.
C)$110,000 for reworking the units.
D)$35,000 for selling the units to the junk dealer.

Question

Quizplus · Accepted Answer

The relevant cost for Kelly to consider in making its decision is the cost of reworking the units ($30,000) compared to the gain from selling the reworked units ($35,000). Thus, Kelly should choose to rework the units and sell them instead of selling them to the junk dealer. The original product cost of $80,000 is not relevant in this decision because it is a sunk cost that cannot be recovered. The cost of reworking the units is the only cost that can be changed and is relevant to the decision.

Kelly Company Has 20,000 Units in Inventory That Had a Production