ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Once a variable cost is incurred and cannot be recovered, however, it becomes fixed in sunk terms. By definition, $1, 000 worth of variable costs are sunk if they cannot be recovered; once incurred, the realized sunk costs become fixed. It cannot be changed.

Detailed explanation-2: -Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

Detailed explanation-3: -Sunk costs are never relevant is incorrect. It is true that a sunk cost is a historical cost and will never be relevant in making relevant costing decisions.

Detailed explanation-4: -Sunk Cost is that cost which is already spent. Once it is incurred, it can not be recovered. Since it is already spent, its irrelevant in decision making. Examples are Rent of factory. Once Rent is paid, its not recoverable back.

Detailed explanation-5: -Answer and Explanation: The variable costs are not always relevant costs, because the variable costs are relevant or irrelevant depending on other factors. If under different alternatives the variable cost remains the same, then it will not be considered a relevant cost.