Sunk Costs are costs that you have already spent and cannot recover. It should never be considered when making investing decisions, but because we are conditioned to look for a return on all money spent, we rarely exclude these costs. But we should.
There is a fair amount of confusion about what a sunk cost is, and may people make the classic mistake of making decisions on future opportunities based on recovery of the sunk cost. This is a mistake.
The absolute classic dunderclumpen sunk cost mistake is to amortise these costs into something that resembles a fixed cost over the life of the venture and then allocating these costs into the investment decision. This is wrong and may adversely impact your decision-making process because of the false application of these costs to a decision.
A sunk cost, say like past rent paid, is lost and cannot be recovered. Future rent might be considered in an investment decision, but past rent paid should not be factored into future decisions. Similarly, costs associated with a previous software application purchase (accounting program) or previous staff training costs (especially if they are unrelated to the investment decision) should not be considered as part of the fixed costs of the project/decision.
Fixed assets such as plant and equipment are sunk costs, however, there are tax based incentives that allow you to offset these assets against overall income. This has nothing to do with any future investment decisions but need to be factored into your overall profitability. If you already have a display fridge and you need a display fridge for your next product, then the cost of the fridge should not be factored into your costings. You have already spent money on the fridge. Factor in the cost of a display fridge if you need to purchase or lease a new fridge for the new product. In both cases, factor in the operating costs of the fridge.
There have been many ventures (most of which have failed) that promoted the tax minimisation of a venture as the major influencing factor in the decision-making process. If you are considering an investment decision on the tax minimisation opportunities that it might offer, then run away from it. Run far away from it.
The decision that you make on expanding your product range, expanding into different markets or going the other way such as reducing your product range or exiting a market, must always exclude previously spent cash, time, and resources. The viability of the new venture needs to start with a clean slate and the review of a current venture needs to exclude costs that you cannot recover.
So, in summary; Sunk costs need to always be excluded from new venture opportunity decisions, but as investors sometimes this is easier said than done. Stick with the strategy; remember sunk costs have already been factored into your overall tax position. Trying to recover these costs on your next move will distort the numbers and may adversely influence what might actually be a great idea.