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Part way through the production process it is discovered that the cost assignment was inaccurate for...

Part way through the production process it is discovered that the cost assignment was inaccurate for product A and that there has been an underestimation of $150 per unit. They are unable to change the pricing because of contractual obligations.

What is the impact of this error in cost assignment if sales were as predicted?

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Answer #1

Since the selling price remains the same due to contractual obligation, the cost of product should be increased by $150 per unit. That discovery of cost will results in the lower gross profit.

If the Gross profit per unit is more than $150 then the gross profit is reduced by $150 per unit.

If the Gross profit per unit is less than the $150 then the product A generates loss.

In both the scenerio, companies profit will go down by:-

Number of units sold x $150

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