Exhibit 7-1
Talmont Products has dropped the price per unit of its smart phone product from $1,060 to $500.There are some units in work-in-process inventory that have costs of $600 per unit associated with them.Talmont could sell these units in their current state for $400.It will cost Talmont $40 to complete these units so that they can be sold for $500 each.
-Refer to Exhibit 7-1.Talmont is considering the option of throwing away the remaining smart phone units that are in work-in-process inventory.What effect would this decision have on net income?

Question

Quizplus · Accepted Answer

Completing each unit costs $40, and they can be sold for $500, making the relevant cost to consider $600 (initial cost) + $40 (completion cost) = $640. Selling them as is would only bring in $400, leading to a loss of $240 per unit. However, the question asks about the effect of discarding the units, not selling them as is or completing them. The cost already incurred ($600) is a sunk cost and cannot be recovered if the units are discarded. Thus, discarding them would mean losing the opportunity to recover any part of the $600 spent on each unit, effectively decreasing net income by $600 for each unit discarded.

Exhibit 7-1 Talmont Products Has Dropped the Price Per Unit of Its