Asked by Farhan Malik on Jul 15, 2024
Verified
A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85.Later,a manager has an opportunity to outsource production to another company at a cost per unit of $1.75.If you are the manager,you
A) should consider the $400,000 as a sunk cost,not relevant to the decision.
B) should reduce his effort by ignoring any new developments and letting the production run as it is.
C) should ignore the $400,000 fixed cost.
D) Both A & C
Sunk Cost
Costs that have already been incurred and cannot be recovered, which should not affect future investment or business decisions.
Outsourcing
The practice of contracting out certain business functions or processes to a third-party provider.
Fixed Cost
Fixed cost refers to expenses that do not vary with the level of production or sales, such as rent, salaries, and insurance.
- Discern between sunk costs and relevant costs within decision-making processes.
- Analyze the selection process through the lens of opportunity costs, excluding the consideration of sunk costs.
Verified Answer
AA
Abdulmohsin AlsufayanJul 21, 2024
Final Answer :
D
Explanation :
The $400,000 investment is a sunk cost, meaning it cannot be recovered and should not influence future decisions. Therefore, it should be ignored (choice A & C). However, the manager should still consider the new opportunity to outsource production at a lower cost per unit, as this will further reduce their overall production costs.
Learning Objectives
- Discern between sunk costs and relevant costs within decision-making processes.
- Analyze the selection process through the lens of opportunity costs, excluding the consideration of sunk costs.