Dismantling costs = sunk costs?

Question

Hey everybody,

aren't the dismantling costs of the swiss facility sunk costs? They incur independet of the decision to re-tool the facility and extend the lease and should therefore be ignored?

Best regards,

Answer 1

Hi!

yes, it is sunk costs and should not play a role in a decision for the future.

However, you are misunderstanding this concept in the given context. The criterion for the yes/no-decision has been clearly defined - 10% profit margin! This profitability target relates to the actual profit that can be expected, and the dismanteling costs are already "priced in" this target. So given that dismanteling costs will occur anyway, this means that the "pre-dismanteling-profit-margin" needs to be higher than 10%.

Cheers, Sidi

Answer 2

Hello!

This is one of the basic concepts in Econ: sunk costs should not be taken into consideration when assessing new business or workstreams.

However, careful here, since here they define clearly the KPI tht they want to look into for go-no go, profit margin, and dismantling costs are already embebbed in the profit margin in the problem.

Hope it helps!

Cheers,

Clara