Question

Imagine that you are going to open your own manufacturing business, making Frozen Pizzas.

a) What sunk costs are relevant to your company? Why are these sunk? If none are relevant, why aren’t any sunk costs applicable to your business?

b) What opportunity costs would you consider when deciding to open your business?

**Looking for thorough answers so I can add any new information to what I have already written on my own**

Answer 1

a) In the event of opening a manufacturing business, say making Frozen Pizzas, there exists many sunk costs like:

1) The baking equipment and the refrigerator procured by the company

2) The training of the kitchen staff.

3) The research and development undertaken by the company.

4) Initial company creation and advertising costs incurred.

These assets are the sunk costs which are irrecoverable once the expense is made to acquire them. There always exists one or the other sunk costs which are invested in particularly for a specific business and are of no other use.

b)The opportunity costs which are applicable to deciding to open the business are:

i) The benefits and gains missed out on not investing in other businesses.

ii) The money that could be saved on not investing in the business.

iii) The additional costs to incur in expectation to have higher sales.

These are the opportunity costs because the investor are losing other gains and benefits on investing the money in one particular business. In other words, the better investment opportunity is the opportunity costs incurred.