Vista Sunk Costs!

The accounting concept of sunk costs is fairly simple. After you make a really dumb investment which turns out worthless, the value is set at zero. In business, if an item has value, it is carried on the books at cost less a deduction called depreciation which is a reduction due to wear and tear. If you purchased an item from a company that is going out of business and it doesn’t work, there’s not much you can do about it. Regardless of what you paid, it should have a value of zero or even negative if you have to pay to get rid of it and the sunk cost is the total paid for the item plus disposal costs.

Now in my case, I paid about $100 dollars for the Vista upgrade and in reality it doesn’t matter much whether it works or not as my sunk cost in either case is $100. If it doesn’t work I’m out $100 and even if it does work, my old computer is worth about $100 whether it has XP or Vista.

Now its rumored that Microsoft spent more than $10 billion developing this dog and since it is rumored that the market is rejecting this dog, it will have to have a replacement soon. This does not mean that we should feel sorry for Microsoft for wasting billions on development cost which they will have to write off as a sunk cost.

If it were only sales to the USA, they would have to write development sales off over the limited domestic sales but that’s not the case. They just dropped the price to $66 for the Chineese market and this will dramatically reduce the development cost. I mean if total US sales were 100 million units with a development cost of $10 Billion, they would have to write off $100 per unit and since I only paid $100 and the retailer got a chunk, we should all be crying for Bill Gates problems.

However, by selling a billion units in China, they won’t sell one less in America and now the development cost per unit is less than $10. WoW, now the American sales seems to be yield a huge profit for what is essentially a dog.

Mark Twain said it all!

“Figures don’t lie, but liars can figure.”


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: