Question

Discuss the differences between opportunity costs and sunk costs. What are these costs used for by managers in decision-making?

Answer 1

Ans: Opportunity cost is the simple words could be defined as the benefit lost by choosing one alternative over the next best alternative. It is the benefit that would be derived from next best alternative.

Sunk Cost represent the cost that has been already incrued based on the past decisions and will have no relevance on the management future decision

Oppoutunity cost is being used by the management in choosing the best alternative choice among all the available options in the process of decision making like whether to shift line of business, make or buy etc. Sunk Cost generally has no relevance in managers decision-making process.