Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines?

The sunk costs of purchasing the machines is $3,400,000

Explanation:

The concept of sunk costs refer to costs that have been incurred by the entity which are not recoverable.

From the definition, it is clear since the machines have second-hand values, the portion of the costs not covered by the second-hand value is the sunk cost

Hence sunk costs could be derived by the formula below:

Sunk costs=Initial acquisition cost-Second-hand value

Initial acquisition costs=5*$1000000

Initial costs of acquisition = $5000000

Second-hand value = ($500000*2) + ($200000*3)

Second-hand value=$1600000

Sunk costs=$5000000-$1600000

Sunk costs=$3400000