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Finance: What are sunk costs? 2 Views


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Description:

Businesses that have unrecoverable costs that would not be part of the equation for any further management decisions are said to be sunk costs. If your business was a bakery, your oven and mixing machines, for example, would be sunk costs, as they would not be factors as to what kind of pastries, cakes, or breads you would make. The oven and mixers would be deployed regardless. Choices of types of flour, sugar, molds, etc. would all be factors for calculating costs of production and pricing for sale.

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Transcript

00:00

Finance allah shmoop What are sunk costs Mother sunk there

00:07

gone There been no money back guarantee kind of costs

00:14

Gold diggers No different kind of gold digger Real ones

00:18

heading to a far off land in a politically unstable

00:21

country Where this week you happen to believe that american

00:24

relationships with whatever stand will be Oh just great forever

00:29

You spend fifty million bucks shipping tractors trucks granola bars

00:34

anti diarrheal medicine hard hats and twenty thousand of those

00:37

little pan thing is that you you know paying for

00:40

golden You know those All right Well you just start

00:42

digging and well there's a coup and the prime minister

00:45

of whatever stand is overthrown by rebels and you have

00:48

to leave or die What to do what to do

00:51

what to do Well so yep That's Fifty billion bucks

00:54

sunk Gone No money back Cia Fifty mil Those dollars

00:58

sunk But some costs aren't just about costs that were

01:01

you know gone and never to be gotten back They

01:04

also relate to project started where you can't get your

01:08

initial outlay back Like when a large corporation are twelve

01:11

Newly minted mba is for their corporate finance department And

01:15

nine get fired within the first two years Could you

01:18

have saved a million box and just hired the three

01:20

Good ones instead No why Because you never know who

01:23

the good ones will be in advance until they've been

01:26

you know tested on the field of financial battle the

01:29

nine fails or a sunk cost of the business You

01:33

can also think about typical sunk costs as revolving around

01:36

the decision whether you should continue to produce a product

01:40

like when you're managing a company you really need to

01:42

ignore sunk costs For example think about our little lemonade

01:46

stand prototype Here we use the best granite and reclaimed

01:49

wood and we're selling lemonade for a buck a glass

01:52

and are variable costs or in fifteen cents give or

01:55

take We spent a million dollars on a lemonade stand

01:58

Is that million dollars considered when we decide whether or

02:01

not we gotta work tomorrow We'll know it's a sunk

02:05

cost or nothing we can do about it It doesn't

02:07

affect whether we go to work tomorrow or not side

02:09

in fact pair so sunk costs are costs which big

02:13

boys and big girls know are never recoup a ble

02:16

there indem it parts of doing business as capital is

02:19

risked on ventures that may or may not have positive

02:23

Payback But hopefully your payback is better than the payback 00:02:26.313 --> [endTime] because this guy got

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