Smith Industries is considering replacing a machine that is presently used in its production process.The following information is available: Which of the following amounts represents a sunk cost?

Question

Smith Industries is considering replacing a machine that is presently used in its production process.The following information is available:  Which of the following amounts represents a sunk cost?

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this scenario, the $55,000 cost of the machine that is currently being used in production is a sunk cost because it has already been incurred and cannot be recovered, regardless of whether or not the machine is replaced. Therefore, it should not be considered in the decision-making process for replacing the machine. The other amounts listed are not sunk costs because they are either future costs (i.e. cost of purchasing a new machine) or relevant costs (i.e. cost savings from using a new machine).

Smith Industries Is Considering Replacing a Machine That Is Presently