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High-End Fashions, Inc., bought a production line of ankle-length skirts last year at a cost of $500,000. This year, however, miniskirts are hot in the market and ankle-length skirts are completely out of fashion. High-End has the option to rebuild the production line and use it to produce miniskirts with a cost of $300,000 and expected revenue of $700,000. How should the company treat the cost of $500,000 of the old production line in evaluating the rebuilding plan

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jepessoa

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the $500,000 that the old production line costed must be treated as a sunk cost. Sunk costs are costs that have already been incurred and the firm cannot recover them no matter what they do. in this case, since ankle-length skirts are out of fashion, the production is useless and is worth $0.

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