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...In capital-intensive industries such as semiconductors or oil and gas, the production facility is very expensive. The cost of raw materials may be relatively low, and the cost of finished goods typically includes an allocation for use of the expensive capacity. Consider the following example:

Here the accountants would say the cost of a unit of finished goods is $10.00. Their job is to allocate all costs using generally accepted accounting principles (GAAP), but as important as GAAP is for accounting, it doesn't always contribute to good management decision-making. Suppose you found a way to reduce your finished goods inventory by 100,000 units, for example by using a faster delivery mode to your customers. Using the $10/unit standard cost valuation, you might think that you would be saving $1 Million. But think about it for a moment: if you reduced finished goods inventory by that many units, what would you really save in cash? Select your answer below:

Choice	Answer
$1 Million $100,000 $10,000 $0