Answer:
The company should be willing to invest the cost of $3 million to complete the development of the new product.
Explanation:
First, the correct completion of the question
If it would cost $3 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete the development?
Answer
To determine the cost: It is important to critically consider which costs are already sunk and which are still to come.
First, and foremost, $5 million already invested into the new product represents a sunk cost or a cost that has already been spent. This means that to stop the project or continue the project ,either options will still mean that $5 million has been spend already. It will not affect the future decision.
Therefore, if you decide to stop the production, the cost of the entire project of development is already $5 million
However, if you decide to continue the project
Sunk Cost = $5 million
Cost of continuation = $3 million (This is current relevant cost to consider against the sales).
Expected Sales of the finished product = $4,500,000
Therefore $4,500,000- $3,000,000= $1,500,000
If stopped, the loss to the company is $5 million
If continued, removing the sunk cost, the company can still make a profit of $1,500,000 of the cost of continuation.
The company should finish development and make the product.
