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Explain why it might be difficult for decision maker to ignore sunk costs.

Question:

Explain why it might be difficult for decision maker to ignore sunk costs.

Relevant costs:

Relevant costs are the costs incurred specifically to a certain alternative. In a financial decision-making process, relevant costs are evaluated and sunk costs are considered as irrelevant.

Answer and Explanation:

Sunk costs are difficult to ignore since some if not all decision-makers believe that sunk costs are still relevant in the decision-making process even though sunk costs are considered as irrelevant when making investment decisions. Decision-makers are often mistaken when sunk costs are taken into consideration and it may result in a wrong decision that impacts the financial profitability of the company. As a rule, sunk costs are ignored and only relevant costs for each alternative are evaluated.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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