Question

2. What is sunk cost? What is the difference between the fixed cost and a sunk cost?

Answer 1

Sunk Cost : Sunk cost is a cost that has already been incurred and cannot be recovered. Sunk cost are costs that are incurred in the past. Sunk cost can be both fixed cost and variable cost.

Example of variable sunk cost: Mr. X purchased a movie ticket for $20 but was unable to go to watch movie due to some emergency. Then the $20 is the cost Mr X has already incuured and that can't be recovered.

Example of Fixed sunk cost: A company purchased a machinery of $25,000 but after some time the company runs out of business and has to shut down. Then the $25,000 has been already incuured by the company and that can't be recovered

Whereas, Fixed Cost is that cost which does not change with the change in production. Fixed costs are costs that are currently being incurred.

All fixed costs are not Sunk Costs and vice versa.