A company invested $400,000 in a technology that reduced the overall costs of pr

Question

A company invested $400,000 in a technology that reduced the overall costs of production by reducing their cost per unit from $2 to $1.85. Later, a manager has an opportunity to outsource production to another company at a cost per unit of $1.75. If you are the manager, you

?should consider the $400,000 as a sunk cost, not relevant to the decision.

?should reduce his effort by ignoring any new developments and letting the production run as it is.

?should ignore the $400,000 fixed cost.

?Both A & C

?should consider the $400,000 as a sunk cost, not relevant to the decision.

?should reduce his effort by ignoring any new developments and letting the production run as it is.

?should ignore the $400,000 fixed cost.

?Both A & C

Explanation / Answer

If you are the manager , you should consider the $400,000 as a sunk cost, not relevant to the decision and should ignore the $400,000 fixed cost and also should base your decision upon economic profit and not accounting profit . Hence, Option (D) is correct i.e both (A) and (C).

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