It is important to understand the characteristics of production costs and to be able to identify which costs are fixed, which are variable, and which are sunk. Examples . the personal computer industry (where most costs are variable) . Computers are very similar, competition is intense, and profitability depends on the ability to keep costs down. Most important are the cost of components and labor. . the computer software industry (where most costs are sunk) . A software firm spends a large amount of money to develop a new application. The company can recoup its investment by selling as many copies of the program as possible. . the pizzeria business (where most costs are fixed). . For the pizzeria, sunk costs are fairly low because equipment can be resold if the pizzeria goes out of business. Variable costs are low- mainly the ingredients for pizza and wages for workers to produce and deliver pizzas