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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]
Alamy There are some economic terms most of us know and understand, such as supply and demand. And there are other terms we will probably never even run across, like implicit logrolling and a ...
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.
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.
“The sunk-cost fallacy refers to the tendency humans have to continue investing in a failing endeavor even when the costs and commitment spent outweigh the benefits,” explains Sarah Kelleher ...
Forget about how much time or money you've invested
Indirect opportunity costs of exit: Sunk costs. Barrier to exit for incumbent firms since the committed assets represent non-recoverable costs. Examples of sunk costs including assets specificity, advertisement campaigns and promotions, research and development costs, and prepaids. Long-term contracts.
It is often important for businesses to distinguish between relevant and irrelevant costs when analyzing alternatives because erroneously considering irrelevant costs can lead to unsound business decisions. [1] Also, ignoring irrelevant data in analysis can save time and effort. Types of irrelevant costs are: [3] Sunk costs [4] Committed costs