Question

Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant?

I. Cost of direct materials used
II. Resale value of Machine X

	a.	Only I
	b.	Only II
	c.	Both I and II
	d.	Neither I and II

Answer 1

Answer : c. Both I and II

Explanation :

• The direct material cost will be less if the company use Machine Y instead of Machine X . Decrease or saving in cost is relevant for decision making . Thus it is necessary to know the cost of direct materials used by both Machine Y & Machine X resectively in order to determine saving in cost .
• Resale value of old machine (Machine X) will be an opportunity cost & it be deducted from the amount of intial investment to acquire new machine (Machine Y)