A company purchases machinery costing $60,000 in October of 2017.Five years later, management discovers better, more efficient machine that could be purchased for $80,000 to replace the existing machine.Management has determined that they are able to sell the original machine for $15,000.In making the decision about buying the new machine, how much are total sunk costs?

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this scenario, the $60,000 spent on the original machinery is a sunk cost because it has already been spent, regardless of future decisions. The potential cost of the new machine ($80,000) and the potential sale price of the old machine ($15,000) are not sunk costs because they are associated with future transactions.

A Company Purchases Machinery Costing $60,000 in October of 2017