Posted: September 22nd, 2026

The Impact of Sunk and Opportunity Costs on Organizational Decision-Making

Week 4 Discussion Response- Account for Management Decision Making

Account for Management Decision Making
Week 4 Learning Resources

Costs
There are many different types of costs that impact a manager’s decision making. Therefore, it is imperative that managers understand what each type is as well as the ones relevant to a specific decision. In these resources, you will examine different types of costs.
• Franklin, M., Graybeal, P., & Cooper, D. (2019). 2.2 identify and apply basic cost behavior patternsLinks to an external site.. In Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/2-2-identify-and-apply-basic-cost-behavior-patterns
• Franklin, M., Graybeal, P., & Cooper, D. (2019). Why it mattersLinks to an external site.. In Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/10-why-it-matters
• Franklin, M., Graybeal, P., & Cooper, D. (2019). 10.1 identify relevant information for decision-makingLinks to an external site.. In Principles of accounting, volume 2: Managerial accounting . OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/10-1-identify-relevant-information-for-decision-making
• Hultman, J. A. (2021, February). Know your relevant costs before making financial decisionsLinks to an external site.. Podiatry Management, 40 (2), 134–138.
• Walden University, LLC. (2024). Cost considerations for accounting decision making Download Cost considerations for accounting decision making[PDF]. Walden University Canvas. https://waldenu.instructure.com

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The Impact of Sunk and Opportunity Costs on Organizational Decision-Making

Managers in both private and public sectors must make hard choices about money and resources. Often, these choices are clouded by past investments or future possibilities. Knowing the difference between sunk costs and opportunity costs is crucial for making smart decisions. A sunk cost is money already spent that you cannot recover. An opportunity cost is the value of the next best option you did not choose. We can see these concepts clearly in the healthcare and public health fields. Mistakes here can have big consequences for patients and the public.

Sunk Costs in Healthcare

A clear example of a sunk cost appeared in my previous role in healthcare administration. Our department bought a new electronic record-keeping system. This software cost thousands of dollars and required months of staff training. The system turned out to be incompatible with some of the hospital’s other platforms. It created more work and frustration instead of making things simpler. Despite seeing the problems early on, leadership was hesitant to stop using the system. They had already spent a lot of money and time. Those funds and hours could not be recovered. The money was a sunk cost (Franklin et al., 2019a).

This decision significantly impacted the organization. Staff productivity decreased. Patient services were delayed. Employees had to use two different systems, which was inefficient. The most affected people were the frontline staff and the patients. They experienced slower service. Managers felt pressure to justify the investment. Continuing to use a faulty system because of past investment often leads to bad financial choices (Hultman, 2021). The hospital stayed with the system longer than it should have. As a result, it missed a chance to become more efficient.

I would have handled this situation differently as a manager. I would first acknowledge that sunk costs should not affect future decisions (Franklin et al., 2019b). You cannot get them back. Instead, I would focus on the costs of switching to a better system. These costs would include implementation expenses, new training, and potential productivity gains (Franklin et al., 2019c). Redirecting resources earlier would have reduced long-term inefficiencies and staff frustration. The key is to focus on opportunity costs, such as the benefits lost by not switching sooner. This focus builds a strong case for change. A better system would have benefited everyone: employees, patients, and the organization as a whole.

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Opportunity Costs in Public Health

In public health, managers face similar cost-related decisions. Resources are often limited, but community needs are great. Understanding opportunity costs helps organizations make more strategic choices. I saw a powerful example of an opportunity cost while working with the Michigan Department of Health and Human Services (MDHHS). Our department had limited federal funding for behavioral health initiatives. Leaders had to decide between expanding an existing in-person outreach program or investing in a new telehealth platform. The telehealth platform could have reached underserved rural populations.

The department chose to expand the traditional in-person services. This decision was partly due to familiarity and existing infrastructure. But it came with a significant opportunity cost. The organization gave up the benefits of the telehealth platform. An opportunity cost is the value of the next best alternative you did not choose (Horngren et al., 2021). In this case, the MDHHS sacrificed a chance to provide more care to people in remote areas.

The decision affected the entire organization. In-person services helped urban communities, but rural clients still lacked care. They already faced transportation and other barriers. Internally, program evaluators noticed that rural service goals were missed. External stakeholders, like rural residents and policy advocates, worried about the gap in equitable access. Furthermore, the decision showed a lack of innovation. This could have hurt MDHHS’s ability to get future funding.

If I were a manager in that situation, I would have advocated for a different approach. I would have used a cost-benefit analysis. This analysis would include a thorough review of long-term community impact. In-person services are valuable. But the scalability and low cost of telehealth should have been weighed more heavily (Noreen, Brewer, & Garrison, 2020). A pilot program could have tested both options. This would have minimized risk while showing how both approaches could work. By clearly acknowledging the opportunity cost, MDHHS could have better aligned its investments with its goal of providing fair access to care.

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Conclusion

Sunk and opportunity costs are fundamental concepts in effective decision-making. Sunk costs are in the past. They cannot be recovered. They should not influence future choices. Opportunity costs, however, are about the future. They represent the value of what you give up. Consequently, they should be a major part of any decision. In both healthcare and public health, managers must move beyond past investments. They must instead focus on what is possible. Data-driven decisions that consider all alternatives lead to better outcomes for organizations and the people they serve. Managers who understand these cost concepts can avoid common financial traps. They can also create more value for their stakeholders.

References

Franklin, M., Graybeal, P., & Cooper, D. (2019a). 2.2 Identify and apply basic cost behavior patterns. In Principles of accounting, volume 2: Managerial accounting. OpenStax.

Franklin, M., Graybeal, P., & Cooper, D. (2019b). Why it matters. In Principles of accounting, volume 2: Managerial accounting. OpenStax.

Franklin, M., Graybeal, P., & Cooper, D. (2019c). 10.1 Identify relevant information for decision-making. In Principles of accounting, volume 2: Managerial accounting. OpenStax.

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2021). Cost accounting: A managerial emphasis (16th ed.). Pearson.

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Hultman, J. A. (2021, February). Know your relevant costs before making financial decisions. Podiatry Management, 40(2), 134–138.

Noreen, E., Brewer, P. C., & Garrison, R. H. (2020). Managerial accounting for managers (5th ed.). McGraw-Hill Education.

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