What is the sunk, or stranded, cost?

Sources – Luke M. Froeb, 2018, Managerial Economics; A Problem Solving Approach (5th ed) p. 59, Cengage.

Review the three scenarios below. Look for which, if any of these scenarios presents an example of post-investment holdup.

a. Your firm conducted a search for a new chief financial officer and hired a highly qualified candidate with a yearly salary of $250,000. After six months the person left to join another firm.

b. Your firm has an exclusive contract to assemble automobile seats for a number of luxury models. Almost 100% of the materials are imported and of those, over 50% include parts manufactured in China. All of the prices on the parts from China increased by 25% when the US imposed tariffs on China. Your company has informed all of its customers that increased cost must be passed on for your firm to continue supplying the seats. All of your customers are reluctantly agreed to pay the additional cost.

3. Your company took note of your progress toward your MBA, and when the director for customer services left the company, you were asked to take over as interim director. You were encouraged to apply for the full-time position once you got your MBA. You served for 13 months, at which time your company was acquired by another company and your position was abolished.