Question

The following options describe costs incurred by owners of a given business. Identify which would be considered a sunk cost for a firm that is considering exiting a market. Drag appropriate answer(s) here Sunk Cost Not a Sunk Cost the cost of two riding lawn mowers for Luke's Lawn Care the cost of taking two online photography classes by Philipe of Philipe's Photography Shop a new large billboard sign displaying "Shantel's Shoes" for Shantel's Shoe Shopfireworks for Frida's Fireworks Displaysfour wedding cakes for Carlos's Cakes Shop

Answer 1

A sunk cost for a firm considering exiting a market is defined as an expense that has already occurred and cannot be recovered. Examples include the cost of lawn mowers, photography classes, billboards, and fireworks, whereas wedding cakes may not be considered sunk unless they are unsellable.

Step-by-step explanation:

When a firm is considering exiting a market, a sunk cost is an expense that has already been incurred and cannot be recovered, irrespective of future events. The sunk cost fallacy is a psychological phenomenon where people continue to invest in something because of the resources they have already committed, despite it no longer being rational to do so. In business decision-making, it is important to ignore sunk costs and focus on future costs and revenues. For example, for Luke's Lawn Care, the cost of two riding lawn mowers is considered a sunk cost if they are no longer useful or cannot be sold for a significant value upon exiting the business. Similarly, Philipe's investment in online photography classes, the billboard for Shantel's Shoe Shop, and fireworks inventory for Frida's Fireworks are also sunk costs.

However, the wedding cakes for Carlos's Cake Shop might not necessarily be sunk costs as they may still be sold to minimize the loss, unless they are personalized in such a way that they cannot be sold to other customers. Making decisions based on what will happen in the future involves looking at variables that can be changed, such as marginal costs associated with additional production, and not the costs that have already been incurred and cannot be altered.

Answer 2

Sunk costs refer to past expenditures that cannot be recovered, such as lawn mowers for a lawn care service, photography classes for a photographer, billboards for a shoe shop, and wedding cakes for a cake shop if these businesses are considering exiting their markets. Such costs should not influence future business decisions as they are already incurred and cannot be changed.

Step-by-step explanation:

When considering which costs would be classified as a sunk cost for a firm that is thinking about exiting a market, it's important to recognize that sunk costs are expenditures that have already occurred and cannot be recovered. For Luke's Lawn Care, the cost of two riding lawn mowers, for Philipe's Photography Shop, the cost of taking two online photography classes, for Shantel's Shoe Shop, a new large billboard sign, and for Carlos's Cakes Shop, four wedding cakes would all be considered sunk costs if these businesses are exiting their markets. These costs cannot be recovered whether or not the business continues operations.

On the other hand, for Frida's Fireworks Displays, the fireworks could potentially be sold to another firm or used at a later date, hence they might not necessarily be sunk costs unless they are specific to an event that is now canceled and have no resale value.

It is essential for firms to be aware that sunk costs should not influence their decision-making about future actions, as these costs are already incurred and cannot be altered. Decisions should instead be based on variable costs that can still be affected by current and future choices.