Question

A sunk cost is one that _______ Select one:
a. should determine the rational course of action in the future.
b. was paid in the past and will not change regardless of the present decision.
c. has the most impact on profit-making decisions.
d. changes as the level of output changes in the short run.

Answer 1

Answer:

The correct answer is option b.

Explanation:

Sunk costs refers to historical funds spent or incurred that cannot be recovered. Such costs are considered irrelevant during decision making which impacts on the business's future as they present no influence on present or future prospects.

Example

ABC investors decide to acquire land and develop residential houses at a  location X. This decision is informed on the fact that the government had recently enacted a policy that led to an increase in demand for residential properties in that location. 6 months into construction of the residential houses, the government reviews and rescinds the policy. This leads to a sharp decline in property values in location X. ABC investors had already incurred 10 million dollars in the project. The 10 million dollars is considered sunk cost.