Outdoor Living Company has just received a special order for 500 hammocks.Outdoor Living has sufficient idle capacity to accept the order.Accepting the order will increase Outdoor Living's variable manufacturing costs.Which type of cost is considered a sunk cost to Outdoor Living's decision whether to accept or reject the special order?

Question

Quizplus · Accepted Answer

Sunk costs are costs that cannot be recovered and are irrelevant to the decision-making process. Since the depreciation on equipment that would be used to make the hammocks has already been incurred, it is a sunk cost and should not be considered in the decision whether to accept or reject the special order. Raw materials, labor costs, and material handling costs, on the other hand, are variable costs that will be directly affected by accepting the order and should be considered in the decision-making process.

Outdoor Living Company Has Just Received a Special Order for 500