A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.
-In this decision the sunk costs are:
A)£20,000.
B)£100.
C)£200.
D)£300.

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered regardless of the decision made. In this scenario, the sunk costs are the design costs of £100 and the sales staff costs of £200. The inspector's salary of £20,000 and the training costs of £700 are not sunk costs as they will be incurred only if the order is accepted. Therefore, the best choice is to accept the order if the expected revenue exceeds the incremental costs of the order, which would be the inspector's salary and training costs.

A Department Accepts a New Order from a Customer