Global Enterprises has spent $134,000 on research developing a new type of shoe.

Question

Global Enterprises has spent $134,000 on research developing a new type of shoe. For this shoe to now be manufactured, the firm will need to expand into an empty building that it currently owns. The firm was offered $229,000 last week for that building. An additional $342, 000 will be required for new equipment and building improvements. Labor and material costs are estimated at $4.98 per pair of shoes. Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year. Which one of these correctly identifies the sunk costs? $229,000 value of the building $134,000 for research $229,000 value of the building plus $342,000 for new equipment and improvements $17,800 for interest plus $134,000 for research $229,000 for the building plus $134,000 for research

Explanation / Answer

1.Answer : $134000 For research and development.

        Sunk cost is nothing but cost incurred which we will never recover .Here in this question two costs are already incurred one is research and development cost and another one is builiding cost.Comparing the two if we dont start the shoe manufacturing business all research and development cost we have spent will be wasted but however buiding cost can be recovered by using for some other business activities even though we are not going to use it for shoe manufacturing business.So due to the above reason only research cost can be considered as Sunk cost.

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