Opportunity cost is often hidden, but it must be taken into account when making economic decisions. In contrast, sunk costs do not influence these decisions.

Viewing: What is the opportunity cost?

Define

Sink costs

are called Sunk Costs in English. Sunk costs are expenditures that have already been made and cannot be recovered.

Opportunity cost in English is called Opportunity Cost. Opportunity costs represent the benefits that an individual, investor or business misses by choosing one alternative over another.

Although financial statements do not show opportunity costs, business owners can use it to make decisions when there are many choices. (According to Investopedia, Opportunity Cost)

In simple terms, the opportunity cost is the income that the business loses due to using its resources on the project. Therefore, opportunity costs are not actually spent but are still taken into account when making economic decisions.

How to determine Opportunity Cost

OC = FO – CO

OC (Opportunity cost): Opportunity cost

FO (Return on best foregone option): Profit of the most attractive option

CO (Return on chosen option): Return on chosen option

Example: Investor A plans to invest $100,000. Mr. Think carefully between the two investment options.

Option A: Invest in the stock market, with an estimated profit of 12%/year. Thus, this investor can earn 12,000 USD by investing in stocks.

Option B: Invest in new production equipment. At that time, he will earn 10% more profit, or 10,000 USD, by buying new fixed assets.

Calculate the opportunity cost in case Mr. A chooses investment option 2.

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The answer:

In the example above, the opportunity cost is determined as follows:

OC = FO – CO = 12,000 – 10,000 = 2,000 (USD)

Sunk costs

Sunk costs can be determined based on the definition. Sunk costs are costs that have been incurred before the decision to implement the project, whether the project is implemented or not, this cost has also been incurred.

For example: Cost of investigation, market research, cost of market survey of the project being replaced…

Distinguish between opportunity costs and sunk costs