A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?
A)The firm should turn down the purchase offer because the factory cost more than $15 million to build.
B)The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.
C)The $20 million spent on the factory is an implicit cost, which should be included in the decision.
D)The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.

Question

Quizplus · Accepted Answer

The $20 million spent on the factory is a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered. Therefore, it should not affect the decision to sell the factory for $15 million. The firm should compare the revenue it is currently generating from the plastic flamingos with the cost of production and potential future revenue from the factory if it is used for a different product line. The decision to sell should be based on whether the firm can generate a higher profit by selling the factory and investing the funds elsewhere.

A Corporation Has Been Steadily Losing Money on One of Its