What is a sunk cost?

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The money that’s already been spent and cannot even be recovered is known as a sunk cost. The concept that you have to spend money to make money is represented in the phenomena of sunk costs in a business. A sunk cost differs from future expenditures incurred by a corporation, such as inventory acquisition costs or product price decisions. Sunk costs are not included in future business decisions since the cost remains constant regardless of the decision’s outcome.

Only relevant costs, which include future expenditures that must be incurred, should be considered by businesses when carrying out business decisions. When one option is compared to another, the associated costs are compared to the possible revenue. A firm solely examines the revenue and costs that might vary as a consequence at hand when making an informed decision. Sunk costs should not be considered since they do not change.

According to the sunk cost fallacy, additional expenditures or obligations are justified since the resources previously invested will be lost if they are not. As a result, the sunk cost fallacy is a logical error in which the sunk costs of an activity are taken into account while determining whether or not to proceed with it. Sunk costs are not considered in a sell-or-process-further option, which is a notion that refers to things that can be sold as-is or processed further.

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Pieter Borremans

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