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Expenditure already incurred on advertising, R&D and specialised equipment that cannot be recovered if the firm changes its plans is best described as:
AIncremental cost
BReplacement cost
CSunk cost
DSocial cost
Answer & Solution
Correct answer: C. Sunk cost
1. Sunk costs are those incurred once and for all that cannot be recovered or reversed.
2. Advertising, R&D and specialised equipment outlays are based on past commitments and cannot be undone.
3. They therefore fit the definition of sunk costs and act as a barrier to exit/entry.
4. Incremental cost (A) is additional cost of a new decision; replacement cost (B) is for renewing an asset; social cost (D) is borne by society. Hence sunk cost.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.2_
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