Company wants to put out a new line of shirts. What shouldn't they include in their analysis?
1. any expected changes in the sales levels of current shirts caused by adding the new product line.
2. increased taxes from shirt profits
3. the expected revenue from shirt sales
4. cost of new display for the additional shirts
5. R&D costs to produce the current shirt samples
In economics, sunk costs refers to expenses that have been incurred in the past and cannot be recovered in the future. When making decisions, sunk costs should not be factor into the decisions.
Answer and Explanation: 1
The answer is 5.
The analysis should only include marginal costs, i.e., expenses that are incremental due to the introduction of the new line, and would not have otherwise occurred. In contrast, the analysis should not include sunk costs, which are expenses that have occurred in the past and cannot be recovered now. R&D costs to produce the current shirt samples are sunk costs, i.e., they occurred regardless of whether the new line is put out or not, and cannot be recovered either way. Therefore, this cost should not be included in the analysis.
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fromChapter 31 / Lesson 8
Understand the sunk cost definition. Learn the meaning of sunk cost and sunk cost trap with the help of the sunk cost examples and sunk cost fallacy examples.