Question

A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85. Later, a manager has an opportunity to outsource production to another company at a cost per unit of $1.75. If you are the from $2 to should consider the $400,000 as a sunk cost, not relevant to the decision. O b should reduce his effort by ignoring any new developments and letting the production run as it is. O c. should ignore the $400,000 fixed cost. O d. Both A & C

Answer 1

Option D, Both A & C

Explanation:

A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85 . Later, a manager has an opportunity to outsource production to another company at a cost per unit of $1.75 . If you are the manager, you should consider the $400,000 as a sunk cost, not relevant to the decision and should ignore the $400,000 fixed cost.

Sunk cost is the cost which is already incurred in past and does not have any significance in decision making.

A sunk cost is already incurred in the fields of economy and business decision-making and can not be recovered. Sunk costs are contrasted with future costs, which can be avoided if measures are taken.