Describe an example of a sunk cost or opportunity cost. Two types of costs that can easily be overlooked when making decisions are sunk costs and opportunity costs.
A sunk cost is a cost that was incurred in the past. It cannot be recovered or changed regardless of any management decisions. An opportunity cost is the cost associated with not choosing one alternative over another, and it can be measured in monetary and nonmonetary means.
For example, imagine that an organization hosted a 3-day retreat to promote team building, but it was unappreciated by the employees and caused more harm than good. Once the retreat was paid for and attended, it was a sunk cost, since the managers can never return to the past and change the fact the retreat happened.
The opportunity costs in this situation could be that employees could have spent those 3 days more productively by completing a project, the funds for the retreat could have been utilized elsewhere (e.g., bonuses), or a more effective retreat or team-building exercise could have been booked instead. In this Discussion, you will consider an example of a sunk or opportunity cost and its impact on an organization.
Please write about an American Organization Consider an example from your professional career of either a sunk cost or an opportunity cost. 1. Describe an example of a sunk cost or opportunity cost from your current or past professional career, including why it would be either defined as a sunk cost or an opportunity cost. 2. Analyze the impact that this cost had on the organization, including how the main stakeholder(s) were affected by this situation. 3. With an understanding of sunk or opportunity costs, propose how you, as the manager, might address this scenario differently.
In business decisions, organizations often focus too much on Sunk Costs, ignoring the Opportunity Costs. Sunk Costs are explicit and appear on financial statements so it is understandable why these costs are honed in on. Opportunity Costs are implicit and unseen, so they are often overlooked. The nature of these costs generates confusion around which to consider when making business decisions.
Understanding sunk costs and opportunity costs and their relevance to your business is essential. Smarter business decisions increase savings and cut costs, setting your business up for success.
It is inevitable that businesses will incur costs in their day-to-day operations. Some of these costs are discretionary and can be identified and reduced. Managing both your direct and indirect spend with a centralized procurement software solution makes it easy to track costs and automate business procedures, eliminating nonessential spending. Understanding your business’s costs is the first step to making savings.
Managers with a solid grasp of sunk costs and opportunity costs can help achieve realized savings that match your business’s targets.
A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. Given sunk costs have already occurred, the cost will remain the same regardless of the outcome of a decision, and so they should not be considered in capital budgeting.
It is easy to get hung up on sunk costs, especially when they are explicit costs. Explicit costs are direct payments made to others in the course of running a business, such as wages, rent and, materials. Explicit costs which have already been incurred are sunk and are irrelevant to future decision-making. Explicit costs which will occur in the future, however, are relevant to business decisions as they will be direct costs to the company that could be avoided.
An Opportunity Cost is the loss of other alternatives when one option is chosen or no action is taken. Opportunity costs are unseen, not included in financial reports, and can often be forgotten about in capital budgeting. Part of the reason opportunity costs are unseen is because they consider Implicit Costs. An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. These costs are much harder to measure as they are not always quantitative. Being aware of trade-offs will allow managers to make better-educated investment decisions. The costs and benefits of every other potential alternative must be examined and weighed in order to properly calculate opportunity costs.