Dismantling costs = sunk costs?

Oliver Wyman case: On the Right Track
New answer on Feb 22, 2021
2 Answers
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Jan asked on Jul 08, 2020

Hey everybody,

aren't the dismantling costs of the swiss facility sunk costs? They incur independet of the decision to re-tool the facility and extend the lease and should therefore be ignored?

Best regards,

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Sidi
Expert
replied on Jul 08, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

yes, it is sunk costs and should not play a role in a decision for the future.

However, you are misunderstanding this concept in the given context. The criterion for the yes/no-decision has been clearly defined - 10% profit margin! This profitability target relates to the actual profit that can be expected, and the dismanteling costs are already "priced in" this target. So given that dismanteling costs will occur anyway, this means that the "pre-dismanteling-profit-margin" needs to be higher than 10%.

Cheers, Sidi

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Clara
Expert
Content Creator
replied on Feb 22, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

This is one of the basic concepts in Econ: sunk costs should not be taken into consideration when assessing new business or workstreams.

However, careful here, since here they define clearly the KPI tht they want to look into for go-no go, profit margin, and dismantling costs are already embebbed in the profit margin in the problem.

Hope it helps!

Cheers,

Clara

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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