A sunk cost is spent whatever you decide, so it never belongs in a decision. How to find the relevant costs and the opportunity cost, with an example.
By Sergey BruhPublished 6 min read
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Start the free courseA sunk cost is money already spent that no option on the table can bring back, so it never belongs in a decision, however large it is. What does belong are relevant costs: future cash amounts that differ between the options, including the opportunity cost of what the same people or capacity could do instead. The test for every number is one question: "Will this amount change depending on what we choose now?" If not, leave it out. Below: a product example where both sides of an argument lean on the wrong number, and a pricing example where the same lesson costs different amounts in May and July.
Costs that stay the same in every option (the office, the finance team's salaries, shared overhead) aren't sunk, but they're irrelevant to this choice for the same reason: they can't tip the comparison.
Klasna, an online tutoring school, has spent 960,000 UAH over four months on a maths exam simulator. Two more months would finish it. The CEO says: "We can't throw that money away." The head of finance says: "It will never earn back 960,000, stop now."
Both arguments rest on the 960,000, and that number should not be in the room. It's gone whatever Klasna decides today. The right question is not "was it worth it?" but "is finishing worth it from here, compared with the best other use of the same people?"
The two developers stay on salary in every option, so their pay is out. What changes:
The working: for the simulator, against 260,000 for the reminders. The reminders win by UAH. Seen from the simulator's side, 260,000 is its opportunity cost: what finishing it would cost in the reminders the developers didn't build.
Notice what decides it: not the 960,000, not the salaries, not the rent. If Klasna had spent 2 million instead of 960,000, the answer would be exactly the same. If the reminder estimate dropped below 230,000, it would flip. Only new information about the future can change the decision.
Opportunity cost matters most when capacity is full. A company asks Klasna for 200 English lessons at 520 UAH each, paid by bank transfer (no card fee), below the usual 620. Each lesson pays the tutor 390 and costs 30 in video, so it leaves UAH.
The lowest acceptable price in a full month is the lesson's own variable costs plus the margin it displaces: UAH. In July the floor is 420.
Continuing a project because of what you've already spent on it, rather than because of what it will bring from now on. The past spending is the same whether you continue or stop. In the worked example above, "we can't throw away 960,000" is the fallacy in its plainest form; more sunk cost examples are in the section on where sunk costs sneak back in.
Future salaries aren't sunk, but if they're paid in every option they're irrelevant to the choice. What matters is the opportunity cost of the people's time.
It isn't in the accounts, but it is in the decision. Ignoring it makes any project look good as long as its own extra costs are covered.
Module 8 of the free course Finance for Product People works through this on Klasna's numbers: relevant, sunk and opportunity costs, then the allocation trap, where a whole subject looks loss-making on a report. If you're new to margins, start with contribution margin per lesson. For investments that span several years, see NPV vs IRR vs payback.
