Question

Your company paid $500,000 a year ago for a cargo ship, outbidding the next highest company by $35.000 You discover that ship is unseaworthy and cannot be repaired but could be sold for scrap for $75,000 How would you classify the $500,000? What type of cost is it? What is your opportunity cost of the ship?

Answer 1

The $500000 paid for the ship one year back is a sunk cost. These are costs which are already paid and there is nothing one can do about that. These costs should not matter for any future decision making as the decision should only depend on the maximum profit that you can generate from future revenue and variable costs. Thus, it should be sold for $75000, despite being a very low amount as compared to what was paid for it.

The opportunity cost of having a ship is not having a ship. Now, this means that $500000 would have been saved and put to some other use. Thus, whatever one could have done with that money is the opportunity cost of investing in the ship