Question

Suppose an electricity distribution firm purchases a number of metal poles for inventory at a price of ?? per pole. Sometime later, metal poles become obsolete in the industry in favour of fiberglass poles, and command a price of ?? per pole in the scrap metal market. By the time the firm switches to fiberglass poles, some of the metal poles previously purchased remain in the firm’s inventory. The price of a fiberglass pole is ??. Assume that 0 < ?? < ?? < ??. In terms of these variables, quantify the accounting and economic costs of each of the following activities:

i. Past purchase of a metal pole for inventory.

ii. Current purchase of a fiberglass pole for inventory.

iii. Keeping a fiberglass pole in inventory.

iv. Keeping a metal pole in inventory.

v. Selling an uninstalled metal pole for scrap.

Briefly explain which of the quantified costs are sunk.

Answer 1

The following from the list are sunk costs :

1. Past purchase of a metal pole for inventory

2. keeping metal pole in inventory

As mentioned in the question , that metal poles become obscelete after fibre glasses, the costs incurred on metal poles would be sunk costs.Sunk costs are the costs that are already incurred in the past and cannot be recovered now. When the metal poles will become obscelete, nobody will buy it and costs incurred on it woud not be recovered.