Marine Industrial Coatings, Inc. is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow:
-Sunk costs include:
A)the original cost of the existing system.
B)the original cost of the new system.
C)the current salvage value of the existing system.
D)the annual operating cost of the new system.

Question

Marine Industrial Coatings, Inc. is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow: 
-Sunk costs include:
A)the original cost of the existing system. 
B)the original cost of the new system. 
C)the current salvage value of the existing system. 
D)the annual operating cost of the new system.

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this case, the original cost of the existing system is a sunk cost because it has already been paid and cannot be recovered. The other options are not sunk costs because they either have not yet been incurred (the original cost of the new system), or can potentially be recovered (the salvage value of the existing system) or can be affected by the decision to switch to the new system (the annual operating cost of the new system).