A manager invests $20,000 in equipment that would help the company reduce it's per unit costs from $15 to $12.He expects the equipment to be in use for the next seven years.After two years,he realizes that if he outsourced the production,the unit cost would be $7 instead.At this point what should the senior manager do?

Question

​A manager invests $20,000 in equipment that would help the company reduce it's per unit costs from $15 to $12.He expects the equipment to be in use for the next seven years.After two years,he realizes that if he outsourced the production,the unit cost would be $7 instead.At this point what should the senior manager do?

Quizplus · Accepted Answer

The manager should write off the equipment as a sunk cost and allow for outsourcing since it is cheaper. Even though the manager has invested $20,000 in the equipment, the outsourcing option provides a cheaper per unit cost than using the equipment. Therefore, the manager should opt for outsourcing, and the equipment should be written off as a sunk cost.

​A Manager Invests $20,000 in Equipment That Would Help the Company

A Manager Invests $20,000 in Equipment That Would Help the Company