Question

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

Answer 1

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are sunk costs.

A Sunk cost is what?

• Money that has already been spent and cannot be recouped is referred to as a sunk cost.
• The sunk cost phenomenon in business is an example of the notion that one must "spend money to make money."
• A sunk cost is distinct from potential future expenses a company can incur, such as choices on the price of products or the cost of purchasing inventories. Sunk costs are disregarded while making future business decisions since they won't change regardless of the choice made.

Give an example of Sunk cost.

• Let's say XYZ Clothing produces baseball gloves. It leases a factory for $5,000 each month, and the machinery was paid in full for $25,000 before. The business makes a simple glove model for $50 and sells it for $70. The producer can make a $20 profit on each basic model sold. As an alternative, it can carry on with production while spending an additional $15 and sell a premium model glove for $90.
• The company weighs the $20 increase in revenue against the $15 additional cost when deciding whether to produce the premium glove to generate a $5 profit. The cost of the factory lease and the cost of the equipment are both buried expenses and are not taken into consideration when making decisions.
• Sunk costs become important costs and ought to be included in company choices on upcoming events if they can be removed at some point.
• Any sunk costs that have expiration dates should be taken into consideration, for instance, if XYZ Clothing is thinking about closing a production plant. XYZ Clothing weighs the revenue that would be lost if production stopped along with the expenditures that would also be eliminated when deciding whether to close the facility. If the factory lease expires in six months, the lease cost should be included as an item that can be reduced or eliminated since it is no longer a sunk cost. The plant should be shut down if the overall costs exceed the revenue.

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