The Martin Car Company is considering whether to continue to make the tires for its cars, or to buy tires from Swift Corp. Which of the following would be considered a "sunk cost" with regard to this decision?
A) The cost per unit it would pay to buy tires from Swift Corp
B) The costs it had incurred two years ago to design its own tires
C) The variable labor costs it incurs in making its own tires
D) The labor costs it incurs in making its own tires

Question

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of the future decision made. The cost incurred two years ago to design its own tires would be a sunk cost because it has already been incurred and cannot be recovered, regardless of whether the company decides to continue making its own tires or to buy them from Swift Corp. The other options are not considered sunk costs because they are ongoing or future costs and can be avoided or changed by the company's decision.

The Martin Car Company Is Considering Whether to Continue to Make