G & L Plastic Molders spent $1,200 last week repairing a machine. This week the

Question

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?  

a) opportunity

b) fixed

c) incremental

d) sunk

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? opportunity fixed incremental sunk

Explanation / Answer

Hi,

Please find the answer as follows:

Option D (Sunk Cost) is the correct answer.

Explanation:

It will be classified as a sunk cost because the expenditure has already been incurred. It has no relevance in the decision making as it is irrecoverable.

Opportunity Cost has no relevance in this case, as it is concerned with the cost of another alternative that is required to be foregone to pursue some other action.

Repairs cannot be catagorized as a fixed cost as repairs may have to be performed as and when there is a need.

Incremental Cost is concerned with the increase in cost as a result of increase in production by 1 unit.

Thanks.

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