How Sunk Costs Have Influenced Decisions by Mistake Essay

How Sunk Costs Have Influenced Decisions by Mistake Essay

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Give a few examples (Minimum of 3 examples) of how sunk costs have influenced you in your decisions by mistake.

PROFESSOR’S GUIDANCE FOR THIS WEEK’S LE:

When it comes to making economics/general decisions we do a cost-benefit analysis. Among the costs we take into account, there are some that should not be taken into account, like sunk costs.

1. Please make sure that you read the relevant chapter from the textbook
2. Watch the YouTube videos for this week and additional course material provide

student 1: NgocA sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. For example, your rent, marketing campaign expenses, or money spent on new equipment can be considered sunk costs. A sunk cost can also be referred to as a past cost. A sunk cost is a cost that is forever lost after it has been paid (Baye & Prince, 2017). 1. Marketing example. All businesses market their products and services, a marketing expense is a great example of sunk cost. Any amount of money you spend on marketing or advertising is money you won’t get back or recover. Let’s say you created a music streaming service and spent $15,000 on marketing and advertising to help spread the word about it to consumers. As a result, the marketing and advertising campaigns prove ineffective. Because you’ve already spent $15,000, this amount is considered the sunk cost. This should not be used in any future decisions, nor should you make any additional investments in this regard. 2. Research and development example. As a business owner, you’ll likely spend money on the research and development of your upcoming or current products. Let’s say you spend $20,000 on the development of a new cell phone. Once the product is released, however, no consumers display an interest in purchasing your company’s new cell phone. The $20,000 you spent on the cell phone’s development is considered a sunk cost since it was a failed investment, you won’t be recovering it and, therefore, shouldn’t be considered in your decisions on the fate of the cell phone. 3. Training example. Let’s say you own a store, and you spend $10,000 training your staff on how to use the new software you’ve installed on your company’s computers. After a while, the software is no longer up to par, and you discern that you need to use a different software. This would require you to train your employees yet again. The $10,000 you spent training your employees for the first software is considered a sunk cost because it will never be recovered. A sunk cost is a cost that has already been spent but is not recoverable in any case, and future business decisions should not be affected by past spending. Spending on searching equipment or machinery buying, rent, payroll, marketing, or advertising expenses is the main example of sunk cost. In both economics and business decision-making, sunk cost refers to costs that have already happened and cannot be recovered. Sunk costs are excluded from future decisions because the cost will be the same regardless of the outcome (Baye & Prince, 2017). When making business decisions, organizations should only consider relevant costs, which include future costs—such as decisions about inventory purchase costs or product pricing—that still need to be incurred. The relevant costs are contrasted with the potential revenue of one choice compared to another. Sunk costs are excluded from future business decisions because the cost will remain the same regardless of the outcome of a decision (Drury, 2021). A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action (Hayes, 2021). References. Drury, A. (2021). Sunk Cost. Corporate Finance & Accounting. Investopedia Hayes, A. (2021). Cost-Benefit Analysis. Business Essentials. Investopedia Michael R. Baye & Jeff Prince. (2017). Managerial Economics & Business Strategy, 9th ed.McGraw-Hill Irwin, ISBN: 978-1259290619student 2 jana The definition of sunk costs is that sunk costs are costs that include the whole entity and cannot recover in the future. In addition, that cost should not be considered when management makes important decisions such as investing in other projects since that cost can not be brought up (paid) again. Managers should count only on relevant costs (costs tied up to a specific decision that management makes) when they make an investment decision.      The three examples of sunk cost and wrong decision are, if we imagine, there is a company SDCA that invests $ 2 mil into employee training how to use new computer software. The computer software is not reliable in the near future, and the management will decide not to use the computers anymore. Employee training is a cost sunk, and it should not be considered in any future training. Another example is when a company SDCA hires employees with a beginning bonus of $ 2.000. If the employee becomes unreliable at work and the company fires him, the company loses that money. It is considered for the sunk cost (Accounting Tools 2021). Thakur, n/a, provided an example of a bad decision while using sunk costs in the marketing department. A company has a product line with a specific two-wheeler model; the company decided to use a new line and spend a million dollars for the advertisement and promotion. The product line was not successful at all. Management should not consider this cost in any future decision-making for the same product or another company’s product line.    The following important factor is sunk costs fallacy when management believes that some extra investment should be made or any other money wasted; in other words, management adds extra money to pay project, with the knowledge that the money will not be returned (Accounting Tools, 2021).     According to Stobierski, 2019 a cost-benefit analysis is a decision-making process where managers can estimate the cost and benefits of future projects. It is assembled from a few steps – set up the framework for the analysis, identify costs and benefits, assign value to each cost and benefit, tally the value of costs and benefits, and their following comparison.                                                          References:Accounting Tools. (2021, June 25). Sunk cost definition, https://www.accountingtools.com/articles/what-is-a…Stobierski T. (2019, SEPTEMBER 5). How to do a cost-benefit analysis & why it’s important,https://online.hbs.edu/blog/post/cost-benefit-anal…Thakur M. (N/A). Sunk Cost, https://www.wallstreetmojo.com/sunk-cost-examples/…

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