Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-A senior executive at Ontel argues that the engineers should only be granted the additional $10 million if Ontel can collect $30 million in revenues after the chip is developed.The executive's argument is
A) correct.
B) incorrect;Ontel need only collect $20 million.
C) incorrect;the $20 million already spent is a marginal cost and should be ignored.
D) incorrect;the $20 million already spent is a sunk cost and should be ignored.
E) possibly correct;insufficient information to say.

Question

Quizplus · Accepted Answer

The correct answer is D because the $20 million already spent is a sunk cost, which means it cannot be recovered and should be ignored when making future decisions. The only relevant cost for the decision to invest an additional $10 million is the future revenue of $30 million. Therefore, the senior executive's argument is incorrect because it is based on a sunk cost rather than the marginal cost of production. The answer is not E because there is sufficient information to determine the correct answer based on the concept of sunk costs.

Ontel Engineers Proposed Developing a 10-Gigahertz Microprocessor in Early 2011