A movie production company is considering making a sequel to one of their most popular films of 2009. In their decision, should they consider the cost of the original film or just the sequel? A) They should consider just the cost of the sequel because the cost of the original film has already been covered by the revenue of the original film. B) They should consider the cost of both films because the revenues from the sequel will cover part of the original cost. C) They should consider the cost of both films because the cost of the sequel will likely be less than the cost of the original film. D) They should consider just the cost of the sequel because the cost of the original film is a sunk cost. The only cost that is important here is the marginal cost, or the cost of the sequel.

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Business

Ruffe

30 August, 02:51

A movie production company is considering making a sequel to one of their most popular films of 2009. In their decision, should they consider the cost of the original film or just the sequel? A) They should consider just the cost of the sequel because the cost of the original film has already been covered by the revenue of the original film. B) They should consider the cost of both films because the revenues from the sequel will cover part of the original cost. C) They should consider the cost of both films because the cost of the sequel will likely be less than the cost of the original film. D) They should consider just the cost of the sequel because the cost of the original film is a sunk cost. The only cost that is important here is the marginal cost, or the cost of the sequel.

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Karen Mitchell · Answer 1

D) They should consider just the cost of the sequel because the cost of the original film is a sunk cost. The only cost that is important here is the marginal cost, or the cost of the sequel.

Explanation:

As per relevant costing technique in order to consider the viability of the project we only consider the cash flows that are relevant to the current sequel of the film.

In the scenario given the only cost relevant is the new cost of the sequel, the cost of the original film is the sunk cost that has already been incurred.