Asked by Harun Abdullahi on Jul 12, 2024
Verified
A manager invests $20,000 in equipment that would help the company reduce it's per unit costs from $15 to $12.He expects the equipment to be in use for the next seven years.After two years,he realizes that if he outsourced the production,the unit cost would be $7 instead.At this point what should the senior manager do?
A) Charge the manager for the next five years of depreciation
B) Write off the equipment as sunk cost and allow for outsourcing since it is cheaper
C) Not allow for outsourcing since the equipment is good for another five years
D) None of the above
Sunk Cost
A cost that has already been incurred and cannot be recovered. It should not impact future business decisions because it cannot be changed.
Depreciation
The reduction in the value of an asset over time, particularly regarding tangible assets like machinery and vehicles.
Outsourcing
The business practice of hiring a party outside a company to perform services or create goods that traditionally were performed in-house by the company's own employees.
- Differentiate sunk costs from relevant costs in decision-making contexts.
- Evaluate decisions based on opportunity costs, ignoring sunk costs.
Verified Answer
SJ
Shelby JordanJul 14, 2024
Final Answer :
B
Explanation :
The manager should write off the equipment as a sunk cost and allow for outsourcing since it is cheaper. Even though the manager has invested $20,000 in the equipment, the outsourcing option provides a cheaper per unit cost than using the equipment. Therefore, the manager should opt for outsourcing, and the equipment should be written off as a sunk cost.
Learning Objectives
- Differentiate sunk costs from relevant costs in decision-making contexts.
- Evaluate decisions based on opportunity costs, ignoring sunk costs.