sunk cost


Also found in: Medical, Wikipedia.

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.
References in periodicals archive ?
The instruments of biotechnology market is also likely to witness lucrative growth owing to increasing number of biotechnology firms all over the world and huge expenditure in sunk cost.
This phenomena, known as the sunk cost effect, is exhibited when a previous investment of time, effort, or money increases the likelihood of continued investment (Arkes and Blumer 1985).
The Survey further says, "Since mining involves huge sunk cost, the government should allow only a limited number of large domestic companies with proven track record to compete with CIL and also to bring in the latest technology and skills.
He explained that a brief period of mindfulness meditation can encourage people to make more rational decisions by considering the information available in the present moment, while ignoring some of the other concerns that typically exacerbate the sunk cost bias.
11) By making a conscious decision to do that, he would willingly consume his own capital, therefore 70 units would not denote sunk cost, but rather the price for a subjective pleasure of destroying his funds.
What's remarkable is despite our sunk cost in R&D, these plates provide the same savings to our customers as our generic trauma products offer--over 50 percent less than conventional vendors' pricing," he said.
n] - T is the surplus of a new job (net of sunk cost H).
The mistake of including sunk costs in economic decisions would be fatal if the sunk cost were larger by $110.
The above two observations suggest that the contestable market framework provides a strong second-mover advantage to the entrant, which is not eroded by a sunk cost of entry.
Similarly, ERGAS & SMALL (2000) applied the real options methodology to examine the sunk cost of assets and the regulator's impact on the distribution of returns.
The rare ability to not only distinguish a sunk cost from an opportunity requiring further investment but to unemotionally act on the basis of this distinction is the unmistakable mark of the truly exceptional executive.