A corporation has been steadily losing money on one of its product lines. The factory used to produce that brand cost €20 million to build 10 years ago. The firm now is 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?

Question

Quizplus · Accepted Answer

The €20 million spent on the factory is a sunk cost, which means it is a cost that has already been incurred and cannot be recovered. Sunk costs should not be considered in the decision-making process. The only relevant information is the current value of the factory, which is €15 million. Therefore, it would be advantageous for the firm to sell the factory at €15 million rather than continue to lose money on the product line. Option A is incorrect because the original cost of the factory is not relevant in this decision. Option C is incorrect because the €20 million spent on the factory is a sunk cost. Option D is incorrect because there is no indication in the question that reducing costs by €5 million elsewhere would be necessary or beneficial.

A Corporation Has Been Steadily Losing Money on One of Its