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.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 is correct?
A)The firm should turn down the purchase offer because the factory cost more than $15 million to build.
B)The $20 million spent on the factory is a sunk cost that should not affect the decision.
C)The $20 million spent on the factory is an implicit cost that should be included in the decision.
D)The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.
E)The firm's opportunity cost would be $35 million if it decides to sell the factory.

Question

Quizplus · Accepted Answer

The $20 million spent on the factory is a sunk cost, which means it has already been spent and cannot be recovered. Therefore, it should not affect the decision to sell the factory for $15 million. The decision should be based on the current and future costs and benefits of keeping or selling the factory, not on past costs.

A Corporation Has Been Steadily Losing Money on One of Its