Question

Sunk or Opportunity costs.

Explain the difference between a sunk cost and an opportunity cost and give an example of each. please explain in depth.

Answer 1

Opportunity Cost- Opportunity cost is a measure of the benefit of opportunity forgone when various alternatives are considered. In other words, it is the cost of sacrifice made
by alternative action chosen. For example, opportunity cost of funds invested in business is the interest that could have been earned by investing the funds in bank deposit.

Sunk Costs are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made in the future. For example, the written down
value of assets previously purchased are sunk costs. Sunk costs are not relevant for decision making because they are past costs.
But not all irrelevant costs are sunk costs. For example, a comparison of two alternative production methods may result in identical direct material costs for both the alternatives. In
this case, the direct material cost will remain the same whichever alternative is chosen. In this situation, though direct material cost is the future cost to be incurred in accordance with the production, it is irrelevant, but, it is not a sunk cost.

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