What is a sunk cost?

Question

BlackTom AI · Accepted Answer

When examining the concept of sunk costs, it helps to evaluate each option against the standard definition and its implications for decision-making.
Option 1: "A cost that can be recovered if a project is abandoned". This describes avoidable or recoverable costs, not sunk costs. Sunk costs are those that cannot be recovered, so this statement mischaracterizes the concept.
Option 2: "A cost that has already been incurred and cannot be recovered". This matches the textbook definition of a sunk cost: money spent in the past that cannot be recouped, and for which future decisions should not be influenced by the amount already spent.
Option 3: "A future expense that should be considered in decision-making". This describes prospective or incremental costs, not sunk costs. Sunk costs pertain to past expenditures, while future costs are what decision-makers should focus on going forward.
Option 4: "A variable cost that fluctuates with production levels". This is a description of a variable cost, which changes with output, rather than the concept of a sunk cost. Sunk costs are not defined by variability or future timing; they are defined by irrecoverability.
In summary, the key distinguishing feature is irrecoverability: only option 2 correctly identifies a cost that has already been incurred and cannot be recovered, while the other options describe different cost concepts (recoverable costs, prospective costs, and variable costs) that do not align with the definition of sunk costs.

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