Question

 Dave and Ann Stone have been living at their present home for the past 6 years. During that​ time, they have replaced the water heater for

$ 352$352​,

replaced the dishwasher for

$ 613$613​,

and have had to make miscellaneous repair and maintenance expenditures of approximately

$ 1 comma 520$1,520.

They have decided to move out and rent the house for

$ 986$986

per month. Newspaper advertising will cost

$ 73$73.

Dave and Ann intend to paint the interior of the home and powerwash the exterior. They estimate that those costs will run about

$ 854$854.

The house should be ready to rent after that. In reviewing the financial​ situation, Dave views all the expenditures as being​ relevant, and so he plans to net out the estimated expenditures discussed above from the rental income.

a. Do Dave and Ann understand the difference between sunk costs and opportunity

costs​?

Explain the two concepts to them.

b. Which of the expenditures should be classified as sunk costs and which should be viewed as opportunity​ costs?

Answer 1

Part (a) - No, Dave and Ann do not understand the difference between sunk and Opportunity cost. They consider all cost Relevant. But infact, all cost are not relevant.

Sunk Cost - Sunk cost are those non relevant cost which cant be changed/Recovered/Reduced on any condition. These cost are lost costs.

Opportunity Cost - This is relevant cost. This is cost of Sacrificing an alternative for another alternative.

Part (b) - Sunk Cost

Water Heater	$352
Dish Washer	$613
Miscellaneous Repair and Maintenance Expenses	$1520

Opportunity Cost

Newspaper Advertising	$73
Painting the House	$854