Question

A start-up biomedical engineering firm has begun manufacturing a drug-coated bimetallic stent, which is a thin wire mesh tube inserted in clogged coronary arteries to prop them open and prevent future heart attacks. Identify the following costs of manufacturing the stents as either sunk or avoidable costs now that the firm has received final approval from the Food and Drug Administration (FDA) and manufacturing is currently in progress:

a. Biomedical research and development costs to design the heart stent.

b. Costs of running clinical trials to win FDA approval to begin making and selling the stent to cardiologists.

c. Labor costs to operate the manufacturing equipment.

d. Cost of the drug, high-grade stainless steel, and titanium used in making the stents.

e. Set-up cost incurred to install the manufacturing equipment and to train workers to operate the equipment.

f. Legal costs of filing a patent application.

Answer 1

Fixed Cost or sunk cost, these are the kind of costs that can not be eliminated with the segment, while avoidable costs are those that can be.

Identifying the costs of manufacturing the stents as either sunk or avoidable costs now that the firm has received final approval and manufacturing is in progress:

(a), (b), (e), (f) are the sunk costs, as these have already occurred and even if they discontinue the product, these can not be recovered.

While the remaining are avoidable costs, (c), (d). If the product is discontinued these costs can be avoided.