Question

How would you respond to this post?

Sunk costs are costs that have been incurred previously and cannot be retrieved; therefore, they are irrelevant, meaning that the costs will be incurred regardless of the decision to be made (Douglas, 2012). Most fixed costs are sunk costs unless the asset can be sold to someone else; however, most times, the item is sold at a lower price than the purchase price or historical cost, which is known as the salvage value. The business cards, vehicle paint, signage, and ads in the Yellow Pages are now sunk costs and cannot be recovered. If the partners decide to change the name of the business, these would be additional expenses that would be incurred as well as the technology expenses associated with the winter grass installations and maintenance.

Explicit cost is the price charged for goods and services or the typical business costs or direct costs, such as direct payment made to others in the course of running a business, such as wages, rent, and materials (Tuovila, 2019). Unavoidable costs are costs that the firm is contractually committed to pay regardless of output levels such as rent or salaries for top management; therefore, they are irrelevant (Douglas, 2012).

The implicit costs are the opportunity cost or the trade-off associated with changing the business name (Douglas, 2012). The current name of the business, Summer Lawn Care, implies that it is only a summer lawn care; however, the partners have acquired unique technology and know-how for winter grass installations and maintenance. The current name of the business does not imply in any way that the partners partake in tree cutting. While changing the business name would incur additional costs due to the sunk costs, I agree with the first partner and recommend changing the business name to Lawn and Tree Care because of the implicit costs of additional revenues and new customer base. The current business name is limiting the partner's business and opportunity for more future profits. As a consumer, if I were seeking out a lawn service in the winter, I would not reach out to them because the current name of the business implies that the partners provide summer lawn care solely. If I needed a tree removed, I would not call them, because I would assume that they only offer lawn care services. By changing the business name to reflect the services that they provide accurately, the partners would most likely increase their customer base, which would assist in offsetting the sunk costs that would be incurred.

Incremental costs are costs that will be incurred in the future because of a decision to be made, such as variable costs as fixed costs are not incremental. Only incremental costs are relevant, meaning that the costs are relevant to the decision that is being made.   

Answer 1

The above post is describing the difference between various types of costs incurred by the firm very well. It is explaining them with relevant examples. The sunk costs are those which the firm has incurred and will not be recoverable. The implicit and explicit costs are also rightly described. Thus, an owner or CEO has to decide carefully about investments and ensure to invest wisely to get good returns. This means the investment must ensure positive results I.e. Increase in sales or profit margins or customer satisfaction.