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In economics and business decision-making, a sunk cost (also known as retrospective cost) is a cost that has already been incurred and cannot be recovered. [ 1 ] [ 2 ] Sunk costs are contrasted with prospective costs , which are future costs that may be avoided if action is taken. [ 3 ]
When some costs are sunk and some are not sunk, total fixed costs (TFC) equal sunk fixed costs (SFC) plus non-sunk fixed costs (NSFC) or TFC = SFC + NSFC. When some fixed costs are non-sunk, the shutdown rule must be modified. To illustrate the new rule it is necessary to define a new cost curve, the average non-sunk cost curve, or ANSC.
Some costs that require firm to comply in order to exit market. For example, remediation costs due to environmental regulations. High fixed exit costs. "can include loans, which the company pays back over time, property costs, vehicle costs or any settlement packages for investors or employees." [6] Indirect opportunity costs of exit: Sunk costs.
Here’s an example. The ABC Company makes widgets. The company has fixed costs of $10,000 per month. Each widget costs the company $3.00 to make, and it sells each widget for $5.00.
This could be because of the sunk-cost fallacy. It’s a term borrowed from the finance world, but you don’t have to know a ton about economics to get it. “The sunk-cost fallacy refers to the ...
Capacity cost: The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions. These costs are normally fixed costs. Sunk cost: A cost already incurred, which cannot be recovered. Other costs
From the traceability source of costs, sunk costs can be direct costs or indirect costs. If the sunk cost can be summarized as a single component, it is a direct cost; if it is caused by several products or departments, it is an indirect cost. Analyzing from the composition of costs, sunk costs can be either fixed costs or variable costs.
Along with variable costs, fixed costs make up one of the two components of total cost: total cost is equal to fixed costs plus variable costs. In accounting and economics , fixed costs , also known as indirect costs or overhead costs , are business expenses that are not dependent on the level of goods or services produced by the business.