Sunk or Opportunity costs
Explain the difference between a sunk cost and an opportunity cost and give an example of each. Please explain in depth.
Opportunity Cost- Opportunity cost is a measure of the benefit of opportunity forgone when various alternatives are considered. In other words, it is the cost of sacrifice made by alternative action chosen. For example, opportunity cost of funds invested in business is the interest that could have been earned by investing the funds in bank deposit.
Sunk Costs are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made in the future. For example, the written down value of assets previously purchased are sunk costs. Sunk costs are not relevant for decision making because they are past costs.
But not all irrelevant costs are sunk costs. For example, a comparison of two alternative production methods may result in identical direct material costs for both the alternatives. In this case, the direct material cost will remain the same whichever alternative is chosen. In this situation, though direct material cost is the future cost to be incurred in accordance with the production, it is irrelevant, but, it is not a sunk cost.
B. Respond to the following situations.
1. Which of the following statemeXXX about XXXXXXXXXXX cost XX TRUE?
XXX. Opportunity XXXX accounts XXX XXXXXXXXXXX uses XX resources XXXX as time and XXXXX.
XXXXXX is X) that XX I XXX III only; it is because XX the XXXX XXXX XXXXXXXX XXXXX XXX XXXXX that XXXXXXX a money payment. Implicit costs XXX costs XXXX XX not XXXXXXX a XXXXX XXXXXXX. The XXXXXXXXXXX cost XXXXXXXX both XXXXXXXX and implicit costs. XXXXX opportunity XXXX XXXXXXXX both XXXXXXXX and implicit XXXXX.
2. XXXXX XX XXX XXXXXXXXX statements XXXXX XXXXXXXXXXX costs XX TRUE?
XXX. XX XXXXXXXXX XXXXXXXXXX the opportunity XXXX XX an action we need to XXXXX XXXXXXXX XXX XXXX best alternative to XXXX action.
d) None XX XXX XXXXXXXXXX is XXXX.
Answer is option X) XXXX XX I. XXX opportunity XXXX XX a given XXXXXX is XXXXX XX the value foregone of XXX feasible XXXXXXXXXXX actions. II. Opportunity costs only measure XXXXXX out XX pocket expenditures.
The reason XX XXXX opportunity XXXX refers XX XXX XXXXXXXXXXXX to operating XXXXXX that is XXXXXXX XX not XXXXX XX a XXXXXXX resource in XXX next-best XXXXXXXXXXX use, thus XX the XXXXXXX-valued alternative XXXXXXXXXX in for XXXXXXXXX an option.
X. Suppose XXXX you XXXXXXXX XXXXXXX seeing a XXXX and XXXXX to a XXXXXXX XX a XXXXXXXXXX Saturday XXXXXXX. XXX XXX XXXXXXX to pay $XX XX see XXX movie XXX XXX movie XXXXXX costs $5. XXX XXX XXXXXXX to pay $80 for the XXXXXXX XXX the XXXXXXX XXXXXX XXXXX $50. The opportunity cost XX XXXXX to XXX XXXXX XX:
d) $XX.
Answer:
The XXXXX XXXXXXXXXXX XXXX XX $XX. The opportunity XXXX is XXX XXXX XX XXX XXXXXXXX alternative. XX XX the alternative we are not doing for XXXXX what XX choose. The opportunity cost XXX going XX XXX XXXXX XX $35. XXX XXXXXXX XXXXXX XXXX $XX. XXX XXXXXX I'm XXXXXXX XX pay has no XXXXXXXXX.
X. XXXXXXX XXXX you XXX XXXXXXX to pay $XX to XXX a movie XX XXXXXXXX XXXXX. X ticket XXXXX $10, and XXX XXXX-best alternative use XX XXXX XXXX would XX to XX XX dinner XXXX a friend. The cost of the XXXXXX is $XX and you XXXXX XXX experience XX XXXXXX dinner XXXX your friend XX $60. The XXXXXXXXXXX cost XX XXXXXX XXX XXXXX XX XXXXX XX:
d) $XX.
Answer:
The opportunity cost XX seeing XXX XXXXX XX XXXXX to:
= 60 - 20 + XX = XX
X. XXXXXXX that you XXX XXXXXXX XX pay $XX to see a XXXXX XX XXXXXXXX XXXXX. A ticket XXXXX $15, XXX the XXXX-XXXX alternative use XX XXXX XXXX would be XX XX XX a XXXXXXX XXXXX XXXXX $80 XXX you value XX $XXX. The XXXXXXXXXXX cost XX seeing XXX XXXXX XX equal XX:
d) $70.
Answer:
XXXXXXXXXXX XXXX is XXX XXXXX of your XXXX best alternative. In XXXX case, XXXX next best alternative XX go to a concert. Your XXXXX for XXXX XXXXXXXXXXX XX $80 XXXX a corresponding XXXX of $XXX XXXX the movie seeing ticket XXXX XX $15.
The XXXXXXXXXXX XXXX of seeing XXX movie: XXX-XX+XX = 35
X. Suppose you play a XXXXX of golf costing $XX. XXX XXXX takes four hours XX play. XX you XXXX not playing XXXX you XXXXX be XXXXXXX XXX XXXXXXX $40 per XXXX. The opportunity cost XX your golf XXXX is:
d) $XXX.
XXX XXXX XXXXXXXXX XXXXXXXX XXX XXXXXX students appropriate XXXXXXXX applying XXXXX XXXXXX XXXXXX is XXXXXX
b)$235
XXXXXX:
XXXXXXXXXXX cost= explicit +implicit costs
=cost XX playing golf + XXXXXXX
=$75+$160
=$235
X. XXXXXXX you have XXXXXX and paid for a ticket to XXX Lady XXXX in concert. You were willing to pay up to $200 XXX XXXX XXXXXX, XXX it only cost you $110. On XXX XXX of the XXXXXXX, a XXXXXX offers you a free XXXXXX to the opera instead. XXXXXXXX that it is impossible XX resell XXX XXXX Gaga XXXXXX, XXXX XX the XXXXXXX XXXXX you XXXXX XXXX XX place on a night XX XXX opera, in order XXX you to XXXXXX XXX XXXXX XXXX Lady Gaga?
d) $X.
Answer:
XXXXXXXXXXX cost XXX going XXX XXXXX XXXXXXX XXXX be XXX amount you XXX willing to pay XX XXX the Lady XXXX XXXXXXX i.e. $200. Hence, XXX XXXXXXXXXXX cost of going XX the Katy XXXXX XXXXXXX is $XXX.
X. XXXXXXX XXXX you are XXXXXXX XX pay $XXX XX see XXXXXXX XXXXX XXXX XX the XXXX-On-Foods Arena. Tickets XXXX $100, XXX the XXXX-best alternative use of your time XXXXX be XX XXXX in paid employment XXXXXXX $XX XXXX XXX evening. The XXXXXXXXXXX XXXX XX XXXXXX XXXXXXX Cohen is XXXXX to:
d) $200.
XXXXXX:
The opportunity XXXX XX seeing XXXXXXX Cohen XX equal to XXX XXXXXX XXXXX XX XXX Leonard Cohen play at the XXXX-On-Foods XXXX XXXX use XX the time XX work in XXXX employment earning i.e. $100 + $XX
9. I am considering XXXXXXX my brother $10,000 XXX XXX year. He XXX agreed XX XXX XX% XXXXXXXX XX the loan. If I XXX’t XXXX my brother the $XX,000, it XXXX stay in XX bank XXXXXXX XXX XXX XXXX, XXXXX it XXXX earn 2% interest. What is the XXXXXXXXXXX XXXX XX XX XX XXX XXXX XX XX brother?
XXXXXX:
XXXX to XXXXXXX: $XX,000 x 0.XX = $X,XXX XXXXXXXX
XXXX in bank XXXXXXX: $10,XXX x X.X = $200 XXXXXXXX
The opportunity XXXX to loan XX my XXXXXXX XXXXX be $200 because I will be XXXXXX up XXXX opportunity XX XXXX my money in XXX XXXX.
XX. XX XXXXXXX, in an XXXXXXX to commit to XXXXXXX fit, I signed a XXXX-XXXX, XXXXXXX contract at a XXXXX XXX, XXXXXXXX to pay $40 XXX month in membership fees. I also XXXXX $XXX on XXXXXXXXX stylish XXX XXXXXXX. This XXXXXXX, I XXX XXXXXX to XXXXXX whether or not XX actually go XX the XXX. XXXXX XX the XXXXXXXXX XXX XXXXXXXX XX XXXX decision?
d) XXX of the above were XXXXXXXX.
Answer:
XXX correct answer XX
11. Suppose you XXXX bought XXX paid XXX a ticket to see Kanye in concert. You XXXX XXXXXXX XX XXX up XX $XXX XXX XXXX ticket, but it XXXX XXXX you $XXX. XX the day of the concert, a XXXXXX offers you a free XXXXXX to XXXX Gaga XXXXXXX. XXX XXX XXXXXX XXXX Kanye XXXXXX XXX $XX. XXXX do XXXX XXXX costs XXXXX?
XXXXXX:
Willing to XXX: $350
XXXX XX ticket: $XXX
Resell XXXXX: $80
$350 -$ XXX = $250
$80 - $0 = $XX
12. XXXXX XX the XXXXXXXXX statements about sunk costs XX XXXXX?
XXX. XXX XXXXXXXX XX XXXX costs XXX affect future decision-XXXXXX, if they XXX large enough.
d) I and III XXXX.
Answer XX X)XXX. The presence of XXXX costs XXX XXXXXX XXXXXX decision-making, if XXXX are large XXXXXX, it XX XXXXXXX XX the XXXX XXXX Sunk Costs XXX XXXXX XXXX XXXX XXXX created XX a decision XXXX in XXX past XXX XXXX XXXXXX XX changed XX any XXXXXXXX that will be XXXX in the XXXXXX. XXXX XXXXX XXX not XXXXXXXX XXX XXXXXXXX XXXXXX because XXXX XXX past XXXXX.
XX. As a XXXXXX of UVic’s XXXXXXXXXX XXXX, I pay $30 XXX month in XXXXXXXXXX XXXX. In a typical month I spend XXXXX $XX on beer XX the Club. Every XXXXX I also have XXX option of XXXXXXXXX a meeting of XXX whiskey XXXX (open XXXX to Club members), XX a cost per XXXXXXX of $15, XXXXXXX at XXX beginning XX each meeting. XXXXX XXXX, XXXX do my monthly SUNK XXXXX equal?
d) $95.
Answer:
In the given scenario XXX monthly XXXX XXXXX equal XX $XX XXXXX XX the XXXXXXXXXX fee per month it is taken into account XXX XXXXXX XXX XXXXX because XXX XXXXXXXX to pay has been made in XXX past. To attend the XXXXXXX of the XXXXXXX club is optional so, only take into consideration XXX XXXXXXXXXX XXX i.e. $30
.This is XXX XXXX that has been created XX a XXXXXXXX XXXX in the past XXX XXXX cannot XX changed XX any decision that XXXX XX XXXX in the future.
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