sunk cost

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Sunk Costs

Money that has already been spent. Sunk costs are important because a company may use, for example, an old piece of equipment to make a new product. In this case, sunk costs are positive because no further investment is required. On the other hand, a sunk cost may be negative; for example, that old piece of equipment may break down after its warranty has expired. This means that the owner will not recover the costs no matter what happens.

sunk cost

A past outlay or loss that cannot be altered by current or future actions.

sunk cost

the cost of durable and specific assets such as plant and machinery which cannot be used for other purposes or easily be resold. Where sunk costs represent a high proportion of a firm's total costs the firm may be ‘locked in’ to its existing products and markets, the sunk costs forming a BARRIER TO EXIT from the market. Since such specific assets have little alternative use they have no OPPORTUNITY COST and so naturally should not enter into management decision-making. Consequently in MAKE-OR-BUY DECISIONS the firm need not consider the sunk costs involved in making products but only the additional production costs as opposed to buying from outside suppliers.