Sunk costs are costs that have been incurred and cannot be recovered When a

Sunk costs are costs that have been incurred and

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Sunk costs are costs that have been incurred and cannot be recovered . When a firm’s equipment ( eg. chip-fabrication for microprocessors) is too specialized to be of use in any other industry or cost of R&D to a pharmaceutical company to develop and test a new drug, most of this expenditure is sunk, i.e. (which is) cannot be recovered. Why distinguish between fixed and sunk costs? Fixed costs will affect the firm’s decisions looking forward, whereas sunk costs do not. Fixed costs that are high relative to revenue and cannot be reduced might lead a firm to shut down eliminating those fixed costs and earning zero profit might be better than incurring ongoing losses. Incurring a high sunk cost might turn out to be a bad decision (eg. unsuccessful development of a new product), but the expenditure is gone and cannot be recovered by shutting down. Of course a prospective sunk cost is different and often view as investment (future value is higher than present value).
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