#5 Fixed Cost vs. Sunk Cost
Oct 23rd, 2012 by Maggie Huang
(Feedback of Case#2)
During the class, we were introduced different cost of a company, such as fixed cost, varible cost, sunk cost, and relevant cost. Varible cost and relevant cost are easier to understand since one of them changes relatively to the output and the other changes depends on the decision which the administration makes. But the fixed cost and the sunk cost confused me. But after doing Case 2, I can now clearly seperate these two cost.
Fixed cost is the cost that will disapear when you shut down the company. For example, in case 2, when you shut down the adult department, you don’t have to pay the salary for the manager any more. So the salary is the fixed cost. While the rental fee of the factory is a sunk cost for the company. Shutting down one of the department will not affect the rental fee, because you still need the factory for operating the other product lines. Sunk cost is the cost once it has paid, it can not be recovered.
There is a video I found just now which explains clearly about the fixed cost and the sunk cost.
https://www.youtube.com/watch?v=Eu2UWaFDQKM