What is the Difference Between Fixed Cost and Sunk Cost?
🆚 Go to Comparative Table 🆚The main difference between fixed costs and sunk costs lies in their recoverability. Here are the key distinctions between the two:
- Fixed Costs: These are expenses that remain constant regardless of the levels of production or sales. They are independent of the company's output and are incurred on an ongoing basis. Examples of fixed costs include rent, salaries, and insurance premiums.
- Sunk Costs: These are costs that have already been incurred and cannot be recovered. They are a subset of fixed costs, specifically those that are not recoverable. An example of a sunk cost is the $30 spent on a concert ticket that cannot be recovered if the event is missed.
In summary:
- Fixed costs are ongoing expenses that remain constant regardless of production or sales levels.
- Sunk costs are a subset of fixed costs that cannot be recovered.
- While sunk costs are costs that were incurred in the past, fixed costs are costs that are currently being incurred.
It is important for businesses to consider both fixed and sunk costs when making decisions, as they both impact profits. However, sunk costs should not be considered when making decisions about future actions, as they are not recoverable.
Comparative Table: Fixed Cost vs Sunk Cost
The main difference between fixed costs and sunk costs lies in their recoverability. Here is a table highlighting the key differences between the two types of costs:
| Feature | Fixed Cost | Sunk Cost |
|---|---|---|
| Definition | Fixed costs are expenses that remain constant irrespective of the level of production or output. They are 'fixed' in a specific time period and do not alter with the level of output produced. | Sunk costs are a subset of fixed costs that have already been incurred and cannot be recovered, even by producing a zero output. |
| Recoverability | Fixed costs can be altered, such as by selling or returning an asset. | Sunk costs cannot be recovered, even if a business decides to halt a project or investment. |
| Examples | Rent, salaries, insurance. | Research and development costs, machine purchases, advertising campaigns. |
In summary, while all sunk costs are fixed, not all fixed costs are considered sunk. The defining characteristic of sunk costs is that they cannot be recovered, whereas fixed costs can be altered or stopped.
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