Question

A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85. Later, a manager has an opportunity to outsource production to another company at a cost per unit of $1.75. If you are the manager, you a. ​should consider the $400,000 as a sunk cost, not relevant to the decision. b. ​should reduce his effort by ignoring any new developments and letting the production run as it is. c. ​should ignore the $400,000 fixed cost. d. ​Both A & C

Answer 1

Answer: D. Both a and c

Explanation:

I would give consideration to the $400,000 as a sunk cost, not relevant to the decision and then ignore the $400,000 fixed cost. This is because I am now outsourcing to another company at a price lower than the previous overall cost production.