A sunk cost is the amount of funds/resources that a company/individual has already spent and cannot recover. The concept educates businesses that sunk costs should not influence their future choices or actions. This is because these past expenditures are irrelevant to future decisions.
Example:
A company produces basic cricket bats for $50 and sells them for $90. They are thinking about making better-quality bats, which could cost an extra $20 each. They have already spent money on things like the factory and warehouse, which they can’t get back (sunk costs). So, the decision to make better bats depends mainly on whether they want to spend that extra $20 per bat or not.
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