A closely related mistake is to forget that “overhead” is often a sunk cost. By definition, over-head is not a marginal cost, but something that has been incurred already and is allocated to departments. For example, assume your firm has spent $500,000 on a computer that is currently idle half the time. It serves only one division. Assume that another division can take an additional project that produces $60,000 in net present value, but that will consume twenty percent of the computer’s time. Should your firm take this project? If twenty percent of the cost of the computer is allocated to this new project (i.e., 20% · $500, 000 = $100, 000), the net present value of the new project would appear to be a negative −$40, 000. But the correct decision process is not to allocate the existing overhead as a cost to divisions. The $500,000 on overhead has already been spent. The computer is a sunk cost—assuming that it really would sit idle otherwise and find no better purpose. It may seem unfair to have charged only the original division for the computer and exempt the opportunistic other division. Yet taking this additional project will produce $60,000 in profits without cost—clearly, a good thing. I personally know of plenty of examples in which overhead allocation has killed very profitable projects.
“Capacity” is a subject that is closely related. For example, a garage may be currently only used for half its space. Adding the project “another car” that could also park in the garage would reduce this car’s depreciation. The garage would then have a positive externality on project “corporate cars.” The marginal cost of storing other cars in the garage should be zero.