Question

AJ plans to attend a retreat on mindfulness. He paid a $500 nonrefundable registration fee, made a reservation at a hotel that costs $200, and budgeted $150 for gas and food Two days before the retreat, he becomes ill. Assuming he is able to cancel the hotel without penalty, AJ's sunk cost equals:

A) $150
B) $500
C) $650
D) $850

Answer 1

Answer: AJ's sunk cost equals $500. Option B.

Explanation: A sunk cost refers to a cost that has already been incurred and cannot be recovered. Sunk costs are the opposite of prospective costs.

Prospective costs refer to future costs that may be avoided if action is taken.

Therefore from the scenario presented above, we can see that:

$500 = nonrefundable registration fee.

$200 = hotel reservation.

$150 = gas and food.

Of the above costs, the sunk cost is $500.

This is because it is a nonrefundable registration fee that has already been paid for.

However, after canceling the hotel, there was no penalty, and therefore, no cost was incurred.

The money for gas and food have not even been spent, therefore the money is a prospective cost.

We can therefore see conclude that the sunk cost is $500.