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Question 368

The table illustrates the statement of cash flows for a courier company for the last fiscal year.

Due to aggressive market competition, the management of the company performed a strategy review and based on their findings and the current market conditions they came up with strategic and tactical changes in order to keep a competitive market position.

In order to strengthen customer retention strategies through a new competitive advantage, the company is considering implementing a live parcel tracking system.

The added value will be that the customers may determine the exact location of the parcel whether it is in a warehouse, crossing the ocean through an overseas ship, or travelling in a delivery truck at any time. The system tracks the location of the parcel by tracking the vehicle in which it is contained. However, for a group of old delivery trucks, it was noticed that the engine sound and vibration disturbed the tracking signal and caused interruptions. Therefore, the tracking does not perform accurately on these vehicles. Although the majority of management would like to sell these vehicles and replace them with newer ones, the Chief

Financial Officer (CFO) was strongly against that approach. The CFO argued that instead of hanging tracking devices on the trucks' body, they can have the truck drivers manually send the truck location from a hand held mobile device every 30 minutes.

The company has a total of 134 old delivery trucks that have been in service for 10 years. Each vehicle was bought at a price of $22,000. Depreciation is done using a straight line basis and it is estimated that the vehicle depreciates at $1000 per year. The estimated salvage value per vehicle is about $3,000.

Another area of tactical improvement for the courier company is pricing. The management strongly believes that they can start a price war with the most aggressive competitor. Management thinks, with their variable cost of $4 per parcel and fixed cost of $6 per parcel, they can win the market. However, after implementing the tracking solution, fixed cost will jump to $8 per parcel which made management reconsider their options. The competitor has variable costs of $5 per parcel and fixed costs o $7 per parcel.

The CFO's resistance to replacing the older vehicles represents which type of cost?

    Correct Answer: A

    The CFO's resistance to replacing the older vehicles represents a sunk cost. A sunk cost is an expense that has already been incurred and cannot be recovered. The old delivery trucks were purchased ten years ago at a price of $22,000 each. This investment has already been made, and the trucks have depreciated over time. The decision to keep or replace these trucks should be based on future costs and benefits, rather than the initial investment, which is already a sunk cost.

Discussion
DoomsdayNairOption: A

A. Sunk

Ray81Option: C

C. is the correct answer: Opportunity Cost - potential value that could be realized by pursuing alternative courses of action. Sunk Cost: money and effort ALREADY committed to an initiative Check BABOK v3 pg 185

BirdCatcher

Answer A. Sunk cost: describes the money and effort already committed to an initiative. The psychological impact of sunk costs may make it difficult for stakeholders to objectively assess the rationale for replacement or elimination, as they may feel reluctant to "waste" the effort or money already invested. As this investment spent on the older vehicles cannot be recovered, it is sunk cost and it is effectively irrelevant when considering future action. Decisions should be based on the future investment required and the future benefits that can be gained.

NickMane

what kind of opportunty is to leave old trucks?

786NB786Option: A

Sunk Cost - cost of an investment already made and should never be considered when pursuing new opportunities. Answer is A - Sunk!

RabbitsfootOption: A

The CFO's resistance to replacing the older vehicles is indeed based on the past expense (the original purchase price) that cannot be recovered, which aligns with the definition of sunk costs. Sunk costs are those that have already been incurred and cannot be recovered regardless of future decisions.

OlivierPaudexOption: C

Sunk cost describes the money and effort already commited. In this case, the company hasn't invested yet in the GPS system. So, no sunk money. To go forward, all trucks should be equipped with this new system, means to replace the old trucks. Not doing so, the company will miss an opportunity for innovation and competitiveness if it does not replace its old trucks. So, my Answer is C - Opportunity

OlivierPaudex

There is a problem : Delivery cost There is a solution : Install GPS and replace old truck which are not compatible There is a voice against that approach : Missing an opportunity if not following the solution There is NO sunk cost, cause trucks are not bought yet

TochToch

There is evidence of sunk cost in the question: "The company has a total of 134 old delivery trucks that have been in service for 10 years. Each vehicle was bought at a price of $22,000". Answer is A

WolfedaleOption: C

it's questions like this that make me question the BABOKs purpose but multiple other exams with the same question show Opportunity is the answer.