Question

True or false? A sunk cost is always a fixed cost, but a fixed cost is not necessarily a sunk cost. Explain your response being sure to define your terms.

Answer 1

Answer

True. A sunk cost is always a fixed cost but a fixed cost is not necessatily a sunk cost.Sunk costs are those costs which cannot be recovered.They are fixed in nature so we can say that they are fixed costs.But all fixed costs need not be sunk costs because there are fixed costs which can be recovered.

Example:Take the case of purchasing an equipment (say worth $1000) which is needed only prior to starting production in a plant.$1000 can be called Sunk Cost if the equipment cannot be resold after usage.$1000 can be called simply fixed cost if it can be re-sold to others for a price.

So a sunk cost is always a fixed cost but a fixed cost is not necessarily a sunk cost.

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