Explain why these are opportunity/sunk cost.
1. Sunk: Amount you could have sold a piece of equipment for last month
2. Opportunity: Salary you could have earned while you were on non-paid leave
3. Sunk: Value of floor space in a warehouse facitlity left empty the past 10 quarters.
4. Sunk: Low price of a stock that you chose not to invest in.
Sunk Cost and Opportunity Cost:
Sunk cost refers to the cost that has been incurred by the business and cannot be recovered. It is also referred to as past cost i.e. the cost or expenses made in the past and it has no effect on the future course of action.
Opportunity cost is the sacrifice or the benefit or gains given up while choosing an option and leaving all other available options. It is sometimes referred to as the tradeoff between different available options wherein while choosing one other have to be given up. It is the cost of the giving up the benefits derived from the given up choices,
Answer and Explanation: 1
1. The piece could have been sold the last month. The cost has been incurred last month on retaining it and not selling it. Hence, it is referred to as a sunk cost.
2. It is the opportunity cost of not working and enjoying leisure. Foregoing salary means the consumer has chosen to enjoy leisure and it represents a trade-off between salary and leisure.
3. The expenditure has been incurred for the purchase and maintenance of floor space in a warehouse facility which is not put to use or rented out. The cost of maintenance for 10 quarters without utilizing is the sunk cost.
4. The low price stock whose price has not increased is a sinking investment. On the other hand, if the prices of these shares escalated over the period of time and they give good returns is a blessed investment. Low price stock in which investment has not been made can be considered as sunk cost in the sense that the price of these stocks have increased and they are giving good returns. Also, the case may be that they have invested in high priced stocks with low returns. This again proves to be sunk costs.
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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.