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Sunk Costs

A sunk cost is an investment that has already been made and cannot be recovered, regardless of future actions. It is a fixed, explicit cost that plays a significant role in decision-making for businesses. Unlike opportunity costs, which are often implicit and harder to estimate, sunk costs are usually accurately reflected in financial statements.

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11 views20 pages

Sunk Costs

A sunk cost is an investment that has already been made and cannot be recovered, regardless of future actions. It is a fixed, explicit cost that plays a significant role in decision-making for businesses. Unlike opportunity costs, which are often implicit and harder to estimate, sunk costs are usually accurately reflected in financial statements.

Uploaded by

LittleMinn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PHOEBE

ANGAYE Sunk Costs


What is
a sunk
cost?
A SUNK COST IS AN
INVESTMENT OR PAYMENT
THAT HAS ALREADY BEEN
MADE THAT CAN’T BE
RECOVERED REGARDLESS OF
FUTURE ACTIONS TAKEN.
Sunk costs are fixed
costs.

What are fixed costs?

Fixed costs are costs that


remain the same and
don’t change.
In contrast, variable costs are costs
that are not fixed (don’t change) and
can vary.
Sunk costs are explicit costs.

Explicit costs are costs that result


in actual cashflows. You can put a
dollar to it.

Implicit costs are costs that do


not result in cashflows.
An opportunity cost is what you
had to give up to chose one
option.
How are
sunk costs Opportunity costs are generally
different implicit as you cannot tie them
from down to a monetary value. This
opportunity is not always the case.
costs? For example, you could choose
to take a shift at your part-time
job for $56 or Uber and earn
$30.
Opportunity costs can be
hard to estimate if not
nominal.
Sunk costs can usually
be accurately estimated.

Sunk costs are usually


shown on financial
statements while
opportunity costs are
Why are When sunk costs have been incurred, you can’t get
sunk costs them back. For businesses that means they can’t get
their money back. This plays an important role in
important decision making. They have to strategize depending on
their sunk costs and how much they’ve lost.
?
Examples of
Sunk Cost
True or False?
Salaries for employees who have been laid
off are a sunk cost.
True!
They have already paid the employees who have been
laid off and cannot get the money back.
True or False?
Netflix spent over a million dollars in advertising
but made the money up in subscriptions. It is
not a sunk cost.
False!
It is a sunk cost because they cannot get back the
money they paid for advertising. It does not matter
they recouped the cost in subscriptions. Sunk costs are
independent from events that occur in the future.
True or False?
A sewing factory buys $500,000 worth of
equipment but their revenue exceeds one
million. It is a sunk cost.
True!
It does not matter what their revenue is, what
matters is what they spent. Since they cannot
get it back, it is a sunk cost.
Real World
Examples
Cats: The Musical
A well-known flop, Cats cost $80–100
million to produce and failed to make
its money back. It grossed $75.5
million.
Vaccines
In 2021, The United States
purchased 400 million doses
of the Pfizer‐BioNTech vaccine
at $39 per person, and 200
million doses of the Moderna
vaccine at $30 per person.
Quibi
Quibi was a streaming
service that raised $1.75
billion from investors. It
launched in April 2020
but shut down in
December 2020 after not
meeting subscriber
projections.
Can you think of
any sunk costs in
your life?

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