DISCUSSION 6.

2
Why is it that sunk costs are never relevant to a decision whereas opportunity costs are always
relevant?

Sunk costs are those costs incurred from the past and are completely irrelevant to the decision a
manager has to make in order to determine what plan of action will be taken. Sunk costs in turn are any
expenses that have been incurred to do with prior agreements, even when the conditions have changed
since that particular agreement. As a manager’s decision-making solely affects the future course of their
business, sunk costs in decision-making operations should be trivial.

Opportunity costs are defined as the values of benefits forgone by selecting one decision alternative
over another. Therefore, opportunity costs have proved to be more important as they are able to show
the “decision-maker” or manager what alternatives have been lost or missed, do to their decision to
take an alternative plan of action. Opportunity costs are incredibly relevant in decision making because
when one alternative is sought after while another alternative is not, it becomes a cost in evaluation. For
that reason, the costs accrued in the past are insignificant in decision-making costs, and the cost
differential between two options is important in valuation costs.

Why do you think Goldratt’s Theory of Constraints received so much press by the business
community?

I believe Goldratt’s Theory of Constraints received a mass amount of press by the business community
because of its role in building strategy, based on resource constraints while achieving the most
competitive blend. Goldratt’s focus was to help identify limiting factors that are viewed as constraints.
This theory received so much press because it allowed managers to identify their limiting factors, to
then be able to distribute the resource constraint in the most affective way in order to ensure that the
resources are used to maximize returns. I also believe that Goldratt brought an idea that was unheard of
in the business community. The Theory of Constraints has led to reducing inventory levels, increasing
profit, improvement on utilization capacity, and many more benefits.