Global Enterprises has spent $134,000 on research developing a new type of shoe.For this shoe to now be manufactured,the firm will need to expand into an empty building that it currently owns.The firm was offered $229,000 last week for that building.An additional $342,000 will be required for new equipment and building improvements.Labor and material costs are estimated at $4.98 per pair of shoes.Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year.Which one of these correctly identifies the sunk costs?

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this scenario, the amount spent on research is a sunk cost because it has already been spent and cannot be recovered regardless of the decision to manufacture the shoe or not. The value of the building, the cost of new equipment and building improvements, and the interest expense are not sunk costs because they are all future costs that are dependent on the decision to manufacture the shoe.

Global Enterprises Has Spent $134,000 on Research Developing a New