Question

Oliver Industries is evaluating the manufacturing process for one of their products. Oliver has determined that the process has yearly maintenance costs of $29,000, yearly operating costs of $22,000, and yearly revenues of $97,000. Two years ago, the firm spent $6,000 upgrading the equipment used to make this product, and it expects to spend $5,000 on additional upgrades three years from now. In this scenario, Olive
A has sunk costs of $51,000.
B does not have any sunk costs.
C has sunk costs of $5,000.
D has sunk costs of $6,000.

Answer 1

Answer:

D) has sunk costs of $6,000

Explanation:

Sunk cost is a cost which does not effect the financial decision, as this cost has already been incurred, and now it cannot be revoked.

Here maintenance cost is a regular expense which has to be incurred, and its not the cost which has already been incurred, same applies for operating cost.

Two years ago firm had spent $6,000 upgrading the equipment which was incurred earlier and now that cost cannot be revoked, further it will not lay any impact on any of the decisions made by the financial management.

Further amount to be spend of $5,000 has yet to be incurred and the decision to incur such cost can also be avoided, therefore it is not a sunk cost.

In this scenario D) has sunk sunk cost of $6,000