Question

Sunk costs are costs that _____.

a) Cannot be measured
b) Have already occurred and are not affected by accepting or rejecting a project
c) Will not contribute to profits in the long run even if a project is accepted
d) Relate to other projects of a firm

Answer 1

Sunk costs are costs that have already been incurred and cannot be recovered, and they should not affect current decision-making.

Step-by-step explanation:

Sunk costs are costs that have already occured and cannot be recovered. These are expenditures that happened in the past and are no longer relevant to future business decisions. The concept of sunk costs suggests that such costs should not influence ongoing investment decisions or project evaluations, since they will not change regardless of the actions taken in the present or future.

In business scenarios, this often comes into play when a company must decide whether to continue with a failing project. Even if a firm has already spent significant amounts of money on research, development, or marketing for a new product, if the product is performing poorly, those costs are sunk and should not factor into the decision to continue investment. The focus should instead be on future costs and benefits. The challenging part is overcoming the sunk cost fallacy, which is the human tendency to continue investing in something solely because of the past resources that have been put into it, rather than based on its prospective future benefits.