sunk cost

Examples of sunk cost in the following topics:

• Sunk Costs

  • Sunk costs are retrospective costs that have already been incurred and cannot be recovered.
  • Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken .
  • The idea of sunk costs is often employed when analyzing business decisions.
  • The sunk cost is distinct from economic loss.
  • The sunk cost may be used to refer to the original cost or the expected economic loss.

• Replacement Projects

  • The net cash flows for a project take into account revenues and costs generated by the project, along with more indirect implications, such as sunk costs, opportunity costs and depreciation costs related to the project.
  • The loss of expected future cash flows from the previous project, or opportunity cost, must also be taken into account.
  • Replacement project analysis tells a company whether the costs of a replacement project provide a suitable return on investment.

• Speed of Innovation

  • First-movers also encounter high fiscal risks in integrating a new product or services into their distribution, and failure often means sunk costs.

• Markup Pricing

  • So the relevant cost would be the cost that a buying company would incur if it made the product itself.
  • The first step involves calculation of the cost of production, and the second step is to determine the markup over costs.
  • The total cost has two components: total variable cost and total fixed cost.
  • A cost-plus price will equal average variable costs plus average fixed costs plus markup per unit.
  • The total average cost for a product is determined by dividing the total fixed costs (TFC) and total variable costs (TVC) by the quantity of the product produced, and then summing these together.

• Seasonal Production

  • Seasonal trends and internal projections of consumption in certain goods can have a significant impact on opportunity cost and potential profit for an organization.
  • Playing it safe and have certain items in stock ahead of time can avoid opportunity costs.
  • The downside is it will cost money to keep them (both require appropriate temperature conditions, for example).
  • Perishable goods have an even greater opportunity cost when it comes to mismanaging (and erroneously predicting) demand.
  • If too much of a perishable good is ordered, not only will it cost the organization in unnecessary inventory fees, but also adds the risk of never been sold at all (a complete sunk cost at that point).

• Demand-Based Pricing

  • Pricing factors are manufacturing cost, market place, competition, market condition, and quality of the product.
  • It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
  • Product heterogeneity, market frictions, or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets.
  • Price discrimination also occurs when the same price is charged to customers that have different supply costs.
  • By definition, long term prices based on value-based pricing are always higher or equal to the prices derived from cost-based pricing.

• Financial and Budgetary Controls

  • Determining the cost of a project is one of the most important initial steps for a project manager.
  • Costs and resources should be set during the initiation stage to adequately plan and allocate costs.
  • If resources are mismanaged, the project will be characterized by sunk costs (i.e., investments that procure no returns).
  • Variances can be computed for both costs and revenues to show a project manager whether they are adhering to the project budget.
  • It is important for a project manager to conduct these financial forecasting calculations and budgeting controls to identify budgetary constraints well before costs are incurred and to secure funding from top management.

• Marginal Analysis

  • Marginal cost (MC) is the change in total cost (or variable cost since fixed costs don't change) caused by a change in and activity, usually production.
  • The cost of travel to the blackberry patch is treated here as a sunk (fixed) cost, we are already at the patch.
  • The marginal cost (MC) of berries rises.
  • MC represents the marginal cost of each unit.
  • The total costs (TC) is the area under the MC function.

• Coral Sea and Midway

  • On May 3-4, Japanese forces successfully invaded and occupied Tulagi, although several of their supporting warships were surprised and sunk or damaged by aircraft from the U.S. fleet carrier Yorktown.
  • With both sides having suffered heavy losses in aircraft and carriers damaged or sunk, the two fleets disengaged and retired from the battle area.
  • Although a tactical victory for the Japanese in terms of ships sunk, the battle would prove to be a strategic victory for the Allies for several reasons.
  • Four Japanese aircraft carriers-- Akagi, Kaga, Soryu and Hiryu, all part of the six carrier force to launch the attack on Pearl Harbor six months earlier-- were sunk for a cost of one American aircraft carrier and a destroyer.

• Conflict in the Atlantic

  • .— Winston ChurchillThe outcome of the battle was a strategic victory for the Allies—the German blockade failed—but at great cost: 3,500 merchant ships and 175 warships were sunk for the loss of 783 U-boats.
  • The focus on U-boat successes, the "aces" and their scores, the convoys attacked, and the ships sunk, serves to camouflage the Kriegsmarine's manifold failures.
  • In particular, this was because most of the ships sunk by U-boat were not in convoys, but sailing alone, or had become separated from convoys.
  • Victory was achieved at a huge cost: between 1939 and 1945, 3,500 Allied merchant ships (totalling 14.5 million gross tons) and 175 Allied warships were sunk and some 72,200 Allied naval and merchant seamen lost their lives.