What Are Sunk Costs?

by Craig Anthony

1 min read

Sunk costs are expenses that have already been paid. Since they have already been incurred, it’s impossible for a business to plan around them or keep them from happening. For example, assume that a company paid for its next month of rent. If this is nonrefundable, the costs are sunk; there’s no way the company can recuperate these charges. When attempting to decide between a few alternatives, it is important to disregard sunk costs. These charges don’t have an impact on any decision you make, so they shouldn’t be factored into the decision. For instance, if the company above is thinking about moving to another office location, it shouldn’t factor in the fact that its next month of rent has already been paid. The rent has been paid no matter whether the company stays or goes, and it has the same financial impact on either option. This concept is especially important when making big decisions or embarking on large projects. Imagine that your small business is expanding its product line. To date, it has paid $10,000 to develop a new good, and it expects to pay an additional $8,000. If you had to decide whether to scrap the new product, your decision should be based on whether to spend the additional $8,000. The $10,000 has already been paid and is a sunk cost. Regardless of what you decide to do, you will have spent the $10,000 either way.

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