Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-In deciding whether to continue the 10-Gigahertz chip,Ontel executives should compare the __________ to the expected revenues.
A) $20 million spent plus the extra $10 million
B) $20 million spent
C) extra $10 million
D) $20 million spent minus the extra $10 million
E) $20 million spent plus the extra $10 million plus $5 million for cost overruns

Question

Quizplus · Accepted Answer

The relevant cost for the decision of whether to continue the project or not is the additional $10 million required to finish the project. The $20 million spent so far is a sunk cost and should not be considered in the decision-making process. Therefore, the correct choice is option C - extra $10 million.

Ontel Engineers Proposed Developing a 10-Gigahertz Microprocessor in Early 2011