Distinguish between the different types of coststhat were examined this week, such as sunk costs, opportunity costs, and outlaycosts. What costs are relevant to decision making? How do managers...

Question : Distinguish between the different types of costs that were examined this week, such
as sunk costs, opportunity costs, and outlay costs. What costs are relevant to decision making?
How do managers overcome the natural tendency to consider historical and sunk costs when
evaluating business alternatives?
Solution: Different types of cost are discussed below:-
Sunk Cost:-It is a type of past cost which has already been incurred and so cannot be recovered
back. Other names for sunk costs are embedded cost, prior year cost, stranded cost, or
sunk capital. Sunk Cost can be either fixed (not dependent on the volume of economic activity)
or variable (dependent on volume).
Opportunity Cost:-It refers to the value of alternative (next best generally) that must be
relinquished in order to follow another action. In other words it gives an implication of benefits
which might have been received by choosing alternate action. If manager has two choices -first
investment giving returns of 5% and second one offering 7% return. If manager opts for first
investment considering second one more risky, his/her opportunity...