Which of the following is an irrelevant cost?
A An opportunity cost
B An incremental cost
C A sunk cost
D An avoidable cost
The correct answer and explanation is:
The correct answer is C. A sunk cost.
A sunk cost refers to money that has already been spent and cannot be recovered. Since it cannot be altered by any future decisions, it is considered irrelevant to decision-making. When making economic or financial decisions, the key is to focus on costs that can be influenced or avoided by the choices made going forward. Sunk costs, by definition, are past expenses that cannot be changed or undone, so they should not impact current decisions.
A. Opportunity cost, on the other hand, is the cost of forgoing the next best alternative when a decision is made. This is relevant because it reflects the potential benefits lost by not choosing an alternative course of action.
B. Incremental cost is the additional cost incurred from producing one more unit of output or making a particular decision. This cost is relevant as it helps in determining whether a decision will lead to an increase in profit or not.
D. Avoidable cost refers to costs that can be eliminated depending on the decision made. For example, if a company stops manufacturing a product, the costs associated with producing that product would be avoidable. These costs are highly relevant because they directly influence future outcomes.
In summary, a sunk cost is an irrelevant cost in decision-making because it has already occurred and cannot be recovered. The focus should be on costs that can change based on future actions or decisions.