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Airline Cost Classifications
Published in Bijan Vasigh, Ken Fleming, Liam Mackay, Foundations of Airline Finance, 2018
Bijan Vasigh, Ken Fleming, Liam Mackay
Once these initial starting costs have been incurred, they should not be taken into consideration for future decisions since once the costs have been incurred they cannot generally be recuperated.2 By definition, sunk costs are any expenses that have already been incurred and therefore cannot be recuperated. As mentioned, sunk costs should not be used in making any future operating decisions as they have no bearing on any future outcome; however, managers often let sunk costs factor into their decision making, especially when deciding whether to continue to stay in business. Managers may think that they should remain in business, even when there is no hope of making a profit, because the company has already “spent all the money”. Often called the sunk cost fallacy, managers believe that they must get use out of their start-up equipment even when it is not profitable.
Product Cost
Published in Joyce I. Warnacut, The Monetary Value of Time, 2017
In traditional economic theory, only prospective (future) costs are relevant to an investment decision. Sunk costs should not influence a decision, because doing so does not rationally assess a decision on its own merits. Evidence suggests this theory fails to predict real-world behavior. Sunk costs do affect decisions, because humans are loss averse. For example, you may choose not to purchase a new machine, on its own merits and with a good payback, because you already have a machine that is not fully utilized. One example of sunk cost is equipment expenditures, as the equipment has already been purchased and the purchase price (and depreciation expense) cannot be altered. Another example would be rent under a lease agreement, which again, cannot be changed under the terms and duration of the lease. Both of these examples would be considered overhead. Both would factor into overhead rates and allocations in traditional accounting. Therefore, investment decisions and make or buy decisions using product cost data containing this data are erroneous (often referred to as the sunk cost fallacy).
Internalize failure and success
Published in Christopher Cook, The Entrepreneurial Project Manager, 2017
The sunk cost fallacy is the idea that we spent money on it, so we have to use it. We let the history of time, effort, and spending contradict the performance- based decision. Eric Wright, the CEO of Vets2PM, described a sunk cost fallacy perfectly with his example of buying a ticket to a football game. One person has spent $40 on a ticket. Another person wants to go to the game, but there is torrential weather in the forecast. Both individuals would be risking their lives to attend the game. Wright asked who is more likely to attend the game? Most people in the survey answer the person who spent the money is more likely to attend. In reality, the answer is that neither of them is going to the game is more likely. The fact that one person spent money does not influence the chances of going to the game. The money has been spent already. It should not factor into the future decision. If your life or the project’s life becomes affected negatively, the decision should be obvious.
A stochastic evaluation framework to improve the robustness of manufacturing systems
Published in International Journal of Computer Integrated Manufacturing, 2023
Emanuele Pagone, Yousef Haddad, Ludovico Barsotti, Gino Dini, Konstantinos Salonitis
An estimate of financial implications was devised to further compare different dispatching rules (i.e. FIFO, EDD and SPT) from an economic standpoint. The most turbulent conditions (those in Scenario H) were assumed as benchmark where rework likelihood disturbance was set at maximum level over the replications (set at 300) per policy to get a robust system. The model assumptions are: The system is labour intensive; hence, the focus will be the reduction of working hours and their translation in monetary or alternative resources.The comparison is between the current system (using FIFO) and the overall most robust solution (it will be shown that it is EDD). Hence, the focus will be on comparative costs and benefits, sunk costs such fixed costs are not considered.Real data concerning product, production prices and costs are not available (for confidentiality reasons) so considerate assumptions are made.One year of production is assessed, percentages of part types produced, and part types delivered late proved to be constant across the different scenarios and can be used in the calculations.
Value proposition of predictive discarding in semiconductor manufacturing
Published in Production Planning & Control, 2022
Geert van Kollenburg, Mike Holenderski, Nirvana Meratnia
In economic terms, the cost of resources already spent up until a certain point are called ‘sunk cost’ (Mankiw 2004). Sunk costs should not influence a decision-making process (such as whether to discard a wafer). The cost of resources required to finish a product are called ‘avoidable costs’ (Garrison et al. 2003). These avoidable costs are saved if a correct decision is made and are therefore crucial to the calculation of the benefits offered by predictive discarding. For the sake of generality and ease of calculation, we set the marginal costs of the resources required to produce a single wafer to 1 and denote it as Cprod. The relation between (marginal) avoidable costs Cavoid and (marginal) sunk costs Csunk can then be defined as:
The Moderating Effects of Product Involvement on Escalation Behavior
Published in Journal of Computer Information Systems, 2019
While they may appear to be similar on the surface, sunk cost and completion are “theoretically different concepts that may contribute separately to continuing investment” behavior [18, p. 403]. Moon [37] suggests that sunk costs cause decision-makers to look backward which leads them to try and recover monies already spent by continuing a previously chosen course of action. He suggests that completion level, however, causes decision-makers to look forward which leads them to try and reach closure by completing what they have started. In an empirical study involving an experiment with student subjects, Moon [37] found an interaction effect between sunk cost and completion. Specifically, when completion level is high, sunk cost may exert a stronger impact on decision-making and individuals may be more willing to escalate their commitment.