What is a sunk cost?

• A. Money that has already been spent and cannot be recovered.
• B. A future expense that will be incurred regardless of production.
• C. A cost that varies with output.
• D. A payment that can be canceled without loss.

Answer: (A)

Sunk costs are money that has already been spent and cannot be recovered. This matters because when deciding what to do next, you should ignore past expenditures and focus on future costs and benefits that will depend on your current choice.

Think of buying a nonrefundable ticket: once the money is paid, it’s gone no matter what you decide to do next. That is a sunk cost, and it shouldn’t drive your future decision.

The other descriptions refer to costs that are not already spent and unrecoverable: a future expense that will be incurred regardless of production is a fixed cost associated with continuing activity; a cost that varies with output is a variable cost; a payment that can be canceled without loss is avoidable or reversible.

So, the best description is money that has already been spent and cannot be recovered.