Question

The city of Tustin, California, has spent $10 million on a project to build a new community college. It will cost the city $40 million to finish the project. When making the decision to continue the project, the city’s chief economist tells the city council to ignore the $10 million because
A. the $10 million is a sunk cost.
B. the $10 million doesn’t factor into the total cost of the project.
C. $10 million is only one-fifth of the entire project cost.
D. the $10 million is a variable cost.
E. the $10 million can be recovered if the project is stopped.

Answer 1

Answer:

The correct answer is A

Explanation:

Sunk cost is the cost which is incurred by an entity and that can no longer be recovered. It is that cost which is not considered when making the decision to continue investing in the online project as it cannot be recovered.

In this case, city of Tustin incurred $10 million on the project for building a new community college and further it require $40 million to finish the project. The economist told the city council to ignore $10 million because it is a sunk cost which cannot be recovered.