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Why is a sunk cost ignored in a differential analysis?
AIt is a fixed cost that is spread over the units
BIt is always smaller than the amounts compared
CIt will be recovered whichever option is chosen
DIt is already spent and cannot now be recovered
Answer & Solution
Correct answer: D. It is already spent and cannot now be recovered
1. A sunk cost is a past expenditure that has already been incurred and cannot be recovered.
2. Its amount is identical whichever alternative is chosen.
3. Anything identical across both options cannot change the comparison, so it is left out.
4. The original purchase price of an asset being replaced is the classic example.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.1 Introduction_
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