Question

Frito-Lay, a division of PepsiCo, manufactures, markets and distributes a variety of snack foods, including Fritos corn chips, Lay's potato chips, Cheetos cheese snacks, Doritos tortilla chips, and Quaker Chewy granola bars, just to name the most familiar products. Which of the following costs for Frito-Lay are sunk costs: 1. Commission payments to Frito-Lay sales representatives. 2. All the costs associated with winning approval by the FDA to advertise Frito-Lay's new cheese popcorn snack as a probiotic nutritional supplement. 3. Labor cost for installing two new plasma technology baking ovens at the St. Louis production plant. 4. Legal fees incurred in winning an antitrust lawsuit filed by rival company R. W. Garcia, who sued Frito-Lay for illegal price fixing of flax seed chips. A) 2,3, and 4 B) 1 C) 3 and 4 D) 1, 2, and 4 E) 1 and 3

Answer 1

Sunk costs can be loosely described as those that don't get impacted with the activity in future (e.g., taking up or not taking up a project won't have an impact on the costs already incurred in setting up the legal entity).

Right answer is A. 2, 3, 4 because

1. commission to sales representatives are a function of sales and continuing with sales will impact this cost

2. since FDA approval is already taken and money spent on it, this cost cannot be impacted by increasing or reducing sales

3. since the baking ovens have already been set up, this cost cannot be impacted by increasing or reducing sales. (Cost of operating these ovens, however, is a variable cost and hence not sunk cost)

4. legal cost of the suit has already been incurred and hence this cost cannot be impacted by increasing or reducing sales