Cost Accounting - Sunk Costs and Outsourcing
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Sunk cost, is a cost we have written off and it should not be relevant to the future decision. Your company has spent millions of dollars on a steel plant, but it's cheaper to import. What can we do? Have you seen outsourcing work or not work?
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Solution Summary
This solution discusses sunk costs in relation to a steel mill that was purchased. The company then discovered that it was cheaper to import instead of use the steel mill. The options available to management, and a discussion regarding whether outsourcing works or not, is also included.
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The first statement is correct. A sunk cost is not relevant to decision-making because it cannot be recovered. If a company spent millions of dollars on a steel plant but then discovered it was cheaper to import, there are several elements that should be considered. First, this indicates a problem in management. The cost of a steel mill is likely very high. Management - then - discovered that it is cheaper to import. This should have been a priority to discover before investing such a large amount of cash. (The ...
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