Answered

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14. Fine Exporters Limited, a leading exporter from Ahmedabad, exports ready made cotton garments to
European market regularly. The factory received an order to deliver an order worth Rs. 25,00,000 within
4 weeks to a client based in Germany. Unfortunately there is acute power crisis in the city and so the fac-
tory faces several power cuts during the day. The owners of the business promptly invest in a generator
to overcome this problem by incurring a heavy expenditure of Rs.2,00,000. Due to this, despite the power
cuts, the business is able to deliver its order to the German client on time.
What does this highlight?

Sagot :

It highlights sunk cost.

A sunk cost is a previously incurred expense that cannot be recovered. These costs should not be considered in decision-making. A sunk cost varies from future costs that a company may face, such as inventory purchase costs or product pricing decisions. Sunk costs are exempted from future company choices as they will remain constant regardless of decision outcome. A manufacturing company, for example, might have a number of sunk costs, such as the expense of machinery and equipment, as well as the cost of factory lease. Institutions should only take into consideration the following costs when making financial decisions, which include future costs that must still be incurred.

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