Decision making based on sunk costs.
Consolidated Drugs, Inc. has spent $4 million developing and testing a new anti-aging drug. Management now estimates that it will cost $2 million to produce and market this new product. The present value of total revenue from all future sales of this drug is estimated to be $5 million. On the basis of these numbers, management is recommending dropping the project since costs will exceed revenues.
a.) Do you agree with this recommendation? Explain.
b.) The head of the accounting department indicates which if the product is produced and marketed, $4 million of corporate overhead expenses will be assigned to the product. Does this new information change your answer to (a) Explain.