Which term refers to unrecoverable expenses incurred when a business closes, such as lease payments?

Which term refers to unrecoverable expenses incurred when a business closes, such as lease payments?

• A. variable costs
• B. opportunity costs
• C. sunk costs
• D. fixed costs

Answer: (C)

Sunk costs are costs that cannot be recovered once they’ve been spent, which is exactly what unrecoverable expenses incurred when a business closes means. If a lease has been signed and payments have already been made (or the commitment cannot be recovered), that money is sunk—you can’t get it back by simply shutting down. This concept matters in decision-making because such costs should not influence whether you stay open or close; they’re past costs that cannot be changed by the current choice. This idea is distinct from fixed costs, which describe how costs behave with output (they stay the same in the short run), rather than whether they can be recovered.

Sunk costs are costs that cannot be recovered once they’ve been spent, which is exactly what unrecoverable expenses incurred when a business closes means. If a lease has been signed and payments have already been made (or the commitment cannot be recovered), that money is sunk—you can’t get it back by simply shutting down. This concept matters in decision-making because such costs should not influence whether you stay open or close; they’re past costs that cannot be changed by the current choice. This idea is distinct from fixed costs, which describe how costs behave with output (they stay the same in the short run), rather than whether they can be recovered.