Which one of the following is an example of a sunk cost?

a.$1,500 of lost sales because an item was out of stock

b.$1,200 paid to repair a machine last year

c.$20,000 project that must be forfeited if another project is accepted

d.$4,500 reduction in current shoe sales if a store commences selling sandals

e.$1,800 increase in comic book sales if a store ceases selling puzzles

Question

Business

Harold Morrison

25 June, 18:37

Which one of the following is an example of a sunk cost?

a.$1,500 of lost sales because an item was out of stock

b.$1,200 paid to repair a machine last year

c.$20,000 project that must be forfeited if another project is accepted

d.$4,500 reduction in current shoe sales if a store commences selling sandals

e.$1,800 increase in comic book sales if a store ceases selling puzzles

+3

Answers (1)

Know the Answer?

Douglas Peck · Answer 1

While choosing the projects various relevant costs are to be considered. Sunk cost is one of such costs. sunk costs are costs which has already been incurred. The money has been spent and it will not be recovered. sunk costs are irrelevant and are not take into consideration while making decisions.

Answer and Explanation:

(a) Incorrect

Sales lost is not sunk cost. sales lost due to out of stock inventory is because of wrong decision and mismanaged inventory stock.

(b) Correct

Repair cost incurred and paid cannot be recovered back. it is not relevant for decision making as the cost has already been incurred.

Hence, it is a sunk cost.

(c) & (d) Incorrect

When one alternative is selected over another, there may be a loss of gain from t he project forgone. such gain which lost is called opportunity cost. (d) & (e) is opportunity cost.

(e) incorrect

increase in sale is increase in income. it is not a cost.