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Sunk Costs and Organizational Decision Making - Research Paper Example

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Managerial Decision Making and Sunk Cost Managerial Decision Making and Sunk Cost College Name Subject Abstract “Sunk cost” is a term borrowed from accounting and economics, referring to those costs that have been incurred and are therefore no longer relevant to future decision-making Thus, this research essay will animalize to what extent do sunk costs affect the decision of firms in different industries to diversify into new businesses?…
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Sunk Costs and Organizational Decision Making
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Sunk Costs and Organizational Decision Making

Download file to see previous pages... The $100,000 the company expends to buy the license is a sunk cost. Thus, sunk cost is one that when once it has been incurred, it could not be transformed or changed by a present decision. Thus, the company cannot rectify what was done by going back into the past and undo the decision made in the past. Further, it cannot be refunded or recovered as the government will neither permit the same to be resold or to will buy back the same. (Arnold, 2008, p184). Clark and Wrigley (1995) recognise three varieties of sunk costs which can efficiently produce a lesser or greater magnitude of such locational inaction. In the first type of sunk cost, for instance, for training costs of inward investors , whenever there is a requirement of significant skills to be harnessed , but on the assumption that lion’s share of such inward remittance based on low-skilled jobs and in such cases , sunk costs are particularly so significant. According to Peck (1996), the second type of sunk cost may be the cost of leasing or acquiring local property and land. Poignantly, a considerable quantum of such setup sunk costs may be met by subsidy from either central or state governments or shared by both by way of regional developments of grants and the leveling and provision of premises and sites. As per Gold (1981), there is a technical sense where the economies of scale is associated with the physical capacity which is notionally regarded as set-up sunk costs but none can be important in assessing industries and firms to specific places and the best illustration, here would be the location of chemical industries and petrochemical industries. Lastly, Clark and Wrigley recognise “exit” sunk costs, which become perceptible when a factory winds up its operations or a business exit from industry or a market. The best example here is the cost associated with pension provisions and severance pay. (Phelps, 2002, p 61-62). 2) Statement of the Problem- “Sunk cost” is a term borrowed from accounting and economics, referring to those costs that have been incurred and are therefore no longer relevant to future decision-making (Hirschey, 2009; Taylor, 2010). However, despite it irrelevance in terms of monetary reckoning, the psychological effect of “sunk cost” on the human decision making process remains evident. The effect of sunk costs on decision making in general has been a topic of interest in diverse areas such as human development (Kelly, 2004; Arkes, 1999) and education (Rover, et al., 2009). In business likewise, they figure unintentionally in managerial decision making. 3) Significance of the problem- Without realizing it, investors and managers are prone to the “sunk cost effect.” The disproportionate consideration of sunk costs constitutes a trap to decision making; positions are sometimes taken or products pushed too long in the hope that they may still turn profitable, because the investor or manager refuses to admit that it was a bad investment to the point of abandoning it (A to Z of Management Concepts & Models, 2005). In the interest of avoiding mistakes in decision making that will eventually affect firm profitability, studies should continue on ...Download file to see next pagesRead More
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