Question

Fuller Industries is considering replacing a machine that is presently used in its production process. Which of the following amounts represents a sunk​ cost?

	Old Machine	Replacement Machine
Original cost	​$60,000	​$46,000
Remaining useful life in years	5	5
Current age in years	5	0
Book value	​$33,000
Current disposal value in cash	​$9,000
Future disposal value in cash​ (in 5​ years)	​$0	​$0
Annual cash operating costs	​$8,000	​$4,000

A.

​$60,000

B.

​$33,000

C.

​$46,000

D.

​$9,000

Answer 1

Solution:

Answer is : B. $33,000

Explanation: Sunk Costs are the past costs which has already been incurred and cannot be recovered. Sunk Costs will have no impact on the current or any future decisions. The machine was originally purchased for $60,000 five years ago and was depreciated over the 5 years and now has a book value of $33,000. Currently, this book value will be considered as Sunk Cost which will have no influence on the decision of replacement of machine. Hence, the answer is Book Value of $33,000 is a Sunk Cost.