Kleen Corp owns equipment purchased a few years ago. A used equipment dealer has
ID: 2714605 • Letter: K
Question
Kleen Corp owns equipment purchased a few years ago. A used equipment dealer has offered $80,000 to buy the equipment from the company. A start-up division of Kleen wants the equipment to use in its new business. Kleen wants to charge the start-up division for the equipment. The start-up division argues that the equipment is a sunk cost and should not be charged for it--it was bought and paid for years ago. Who is right--is this a sunk cost or something else? Select the best answer.
Incremental cost-charge the start-division
Opportunity cost--charge the start up
Fixed cost--don't charge the start up
Sunk cost--don't charge the start-up division
a.Incremental cost-charge the start-division
b.Opportunity cost--charge the start up
c.Fixed cost--don't charge the start up
d.Sunk cost--don't charge the start-up division
Explanation / Answer
Answer is b. Opportunity cost--charge the start up
$80,000 is the cost of forgone, i.e. if start would not take this equipment then Klenn might have got $80,000 from sale to dealer, hence it is opportunity forgone therefore its opportunity cost
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