In make or buy decisions, sunk costs should not be considered by management as they have occurred in the past and cannot be recovered. Instead, relevant factors like product quality, sales, morale, and incremental costs should be the focus to ensure future profitability. Therefore, all of the options listed should be considered except d. Workload sunk costs.
In a make or buy decision, management should consider several factors, but they should exclude workload sunk costs from their considerations. Sunk costs are expenses that have been incurred in the past and cannot be recovered.
Because these costs are not relevant to future expenses or savings, they should not influence the current decision-making process. Decisions should instead focus on factors such as product quality, existing sales, employee morale, and incremental costs, all of which can affect future operations and profitability.
Understanding that additional marginal gains tend to become smaller over time is also important. This principle highlights why it is crucial to make decisions based on potential future returns rather than past expenditures.
Management must also consider that dealing with sunk costs can be challenging emotionally as it may require admitting to an earlier mistake, but recognizing their irrelevance is essential for sound business strategy.