An entrepreneur gathers the following information to make a decision on whether to stay open for business or to shut down permanently:
Future operating revenues = $18 million
Future operating costs = $14 million
Sunk costs = $8 million
The entrepreneur should:
A) continue to operate because the operating revenues exceed the operating costs.
B) shut down because the operating revenues are insufficient to cover the operating costs and sunk costs.
C) shut down because the sunk costs are greater than zero.
D) continue to operate to help pay off the sunk costs.

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, so they should not factor into the decision-making process about future operations. The decision should be based on comparing future operating revenues and costs. Since the future operating revenues ($18 million) exceed the future operating costs ($14 million), the entrepreneur should continue to operate.

An Entrepreneur Gathers the Following Information to Make a Decision