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Sunk Cost and Avoidable Costs

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2. The Han calendar company started business on 1 January 2009. The company prints calendars to be used as advertisements by local firms. The firm has been losing money. They are now (1 March 2010) deciding whether to stop producing. The question is how much they will save by going out of business, that is, how much of their costs are sunk and how much of their costs are avoidable. For each item in this list, say how much of the cost is avoidable and why.

(a) For each calender the firm produces, it needs to buy paper and ink. It buys the paper and ink for each job in the appropriate amount, and has no stock of paper or ink on hand at the end of a job.

There is no sunk cost. If the firm goes out of business, the cost of paper and ink will be totally avoided. We save 100% on this cost.

(b) The firm rented a facility in which to produce. The annual rent is 25, 000 dollars, payable on 1 January of each year. They can break their lease with six month's ...

Solution Summary

Sunk cost is assessed.