Harry Haney, manager of the Eastern Division of Mertock Co., made the following comment to the manager of the Central Division:
It’s all well and good for you to say that I should disregard sunk costs when I consider whether to replace the old, inefficient equipment with new, more efficient equipment. But my performance evaluation is based on net operating profits divided by total assets. The new equipment will increase my total asset base and lower the ratio of profits to assets, hurting my performance. Thus, I will not sell the old equipment.
Do you agree with Haney’s statement? Why or why not?

  • CreatedApril 21, 2014
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