Investment Term For The Day - Sunk Cost
Sep 28, 2021 ·
1m 41s
A sunk cost refers to money that has already been spent and cannot be recovered. In business, the axiom that one has to spend money to make money is reflected...
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A sunk cost refers to money that has already been spent and cannot be recovered. In business, the axiom that one has to spend money to make money is reflected in the phenomenon of the sunk cost. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing.
Sunk costs are excluded from future business decisions because the cost will remain the same regardless of the outcome of a decision.
When making business decisions, organizations should only consider relevant costs, which include the future costs that still needed to be incurred. The relevant costs are contrasted with the potential revenue of one choice compared to another.
A business only considers the costs and revenue that will change as a result of the decision at hand. Because sunk costs do not change, they should not be considered.
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Sunk costs are excluded from future business decisions because the cost will remain the same regardless of the outcome of a decision.
When making business decisions, organizations should only consider relevant costs, which include the future costs that still needed to be incurred. The relevant costs are contrasted with the potential revenue of one choice compared to another.
A business only considers the costs and revenue that will change as a result of the decision at hand. Because sunk costs do not change, they should not be considered.
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