Sunk Cost


It takes me months to write the second article about my soap and lotion projects, my apology. However, all my articles will be written based on my own experience.

This time, I want to discuss about sunk cost because this cost is essential in initiating a small business/project and an important aspect in the decision-making process.

According to http://accountingdictionary.org/dictionary/sunk-cost/, sunk cost is defined as a cost that was incurred in the past and which cannot be changed and so is not relevant for future decision-making.

In the earliest stage of soap and lotion making, I have a dilemma in determining how much sunk cost I want to spend. In other words, how much I was willing to spend to buy equipment, variable costs such as oils and attending workshops for my projects. What benefit I would receive for sacrificing my funds? It took me ages to consider sunk cost because of the other opportunities that I had to forgo. For examples: to save my funds in the bank and receive interest, or to buy nice clothes while NZD is overvalued, or to voluntarily repay my student loan.

However, I have made a decision about sunk cost because I need a standard/benchmark for the quality of my products. I have categorised my sunk cost into three categories. The first category is knowledge such as books and workshops. The second category is equipment and variable costs. The third category is distribution and promotion.

The first category is easy. I need to select what books I want to buy, what workshops I want to attend. I can estimate the related costs and make a plan to fund those costs.

The second category is a bit difficult to decide, as there are so many options. Hence, I make my own rule that my decision to spend the sunk cost for this category will be based on the minimum price and durability of equipment. For the variable costs, I choose NZ and Indonesian products, as I want to make a small contribution to those countries.

The third category is the most difficult thing to estimate, as it involves the weight of final products to be sent and the possibility to repeat the shipment. I have sent my first soap samples to Indonesia and there was a problem, the soap samples experienced an oxidation that made them smell strangely. Hence, I make another experiment to test the oxidation process during delivery. I need to do this because I have to make the facial soap by myself until I can convince myself that my facial soaps can be produced in Indonesia to minimise the production cost.

It will be a long process to find out the result of my sunk cost. The good news is that I will test the NZ handmade soap market through Trademe.co.nz prior to the Christmas season. I can do this because I have positive feedback from my NZ friends who have tried my soap samples. Thus, the related sunk cost for the third category in NZ will be the placement fee on Trademe. I will let you know how it goes.


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