What is a sunk cost and why should it be ignored in decision-making?

What is a sunk cost and why should it be ignored in decision-making?

• A. A cost that cannot be recovered; it should not affect incremental decisions.
• B. A cost that can be recovered with effort; it should always affect decisions.
• C. A future cost that is unavoidable.
• D. A fixed cost that does not vary with output.

Answer: (A)

Sunk costs are expenditures that have already been incurred and cannot be recovered, so they should be ignored when making future decisions. In decision-making you focus on incremental costs and benefits—the changes that will occur if you choose one path over another. Because the cost cannot be retrieved regardless of what you do next, it shouldn't influence the choice; only the future costs and benefits that differ between options matter. For example, if you already paid for a nonrefundable ticket, that price is sunk; whether you travel or skip the trip won’t recover it, so the decision should hinge on additional costs and benefits going forward. The other descriptions describe recoverable costs, future unavoidable costs, or fixed costs, which are not the same as a sunk cost.

Sunk costs are expenditures that have already been incurred and cannot be recovered, so they should be ignored when making future decisions. In decision-making you focus on incremental costs and benefits—the changes that will occur if you choose one path over another. Because the cost cannot be retrieved regardless of what you do next, it shouldn't influence the choice; only the future costs and benefits that differ between options matter. For example, if you already paid for a nonrefundable ticket, that price is sunk; whether you travel or skip the trip won’t recover it, so the decision should hinge on additional costs and benefits going forward. The other descriptions describe recoverable costs, future unavoidable costs, or fixed costs, which are not the same as a sunk cost.