Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost?

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this scenario, the original purchase price and accumulated depreciation are sunk costs because they have already been spent and cannot be recovered. The cost to replace the equipment is not a sunk cost because it has not yet been incurred. Therefore, the total amount of sunk cost is the original purchase price minus accumulated depreciation, which is equal to $360,000 (=$600,000-$240,000).

Breezy Company Is Disposing of Equipment That Was Originally Purchased