Define each of the costs below as either sunk, opportunity, cash or book: a. Monthly electricity...

Question:

Define each of the costs below as either sunk, opportunity, cash or book:

a. Monthly electricity expense.

b. Value of floor space in a warehouse facility left empty the past 6 quarters.

c. Amount you could have sold a piece of equipment for last month.

d. Salary you could have earned while you were on non-paid leave.

e. Low price of a stock that you chose not to invest in.

f. Price paid to a consultant for a feasibility study on a prospective project.

Costs:

Costs are incurred by each firm to carry out their daily production activities which means that in order to generate revenue. Spending on introducing various inputs in the production process and administering the smooth functioning of the production process is all constituted in the costs incurred

Answer and Explanation:

a. Monthly electricity expense: These expenses are incurred on a regular basis by the firm. Thus, it is derived from the liquid funds of the firm in the form of cash costs.

b. Value of floor space in a warehouse facility left empty the past 6 quarters: The floor space available is a part of the sunk costs of the firm as the warehouse has been built initially in the business and the costs incurred cannot be withdrawn even if it is being used or not.

c. Amount you could have sold a piece of equipment for last month: This accounts for an opportunity cost which would have been used for some other purpose had it not been utilized in the purchase of equipment.

d. Salary you could have earned while you were on non-paid leave: This cost also accounts for the opportunity cost as if the person was working instead of being on leave then he would have earned the salary. Hence, the salary is the lost satisfaction in order to achieve a leave.

e. Low price of a stock that you chose not to invest in: It can be classified as a book cost as the value for which we did not invest in was the market value or in other words the book value.

f. Price paid to a consultant for a feasibility study on a prospective project: It can be identified as a sunk cost as the price paid to the consultant cannot be withdrawn anymore. It has been incurred as an advance cost for the study.


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How to Calculate Opportunity Cost

from Economics 102: Macroeconomics

Chapter 1 / Lesson 3
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