Final answer:
The correct answer is D. Not relevant for decision-making. Sunk costs are expenditures that cannot be recovered and should not influence future business decisions. While dealing with sunk costs can be psychologically challenging, strategic decision-making requires focusing on future benefits and marginal gains.
Step-by-step explanation:
"Committed" and "Sunk" costs are generally not relevant for decision-making. The correct answer to the provided question is D. Not relevant for decision-making. Sunk costs are expenditures that have already been incurred and cannot be recovered. Hence, they should not influence future business decisions since they will remain the same regardless of the outcome of a decision.
On the other hand, "committed" costs are those that a company has already committed to, but are not necessarily sunk, as they can sometimes be altered or avoided; for example, future lease payments can often be reduced or the lease can be canceled under certain conditions. However, once these costs are actually incurred, they too become sunk and should not affect future decision-making.
It is a common misconception that such costs are indicative of prior bad decisions. Dealing with sunk costs can often be psychologically challenging because it can feel like admitting a mistake. Nevertheless, the strategic response is to acknowledge that these costs are irrecoverable and focus on additional marginal gains and future benefits instead of past expenditures.
Regarding the claim that sunk costs are a result of "prior bad decisions", such an assumption is not necessarily accurate. These costs can result from strategic risks that companies willingly take, and not all risks lead to successful outcomes. Moreover, economics acknowledges that additional marginal gains tend to become smaller as additional units of a good or service are produced, which is unrelated to the concept of sunk costs.