Question

# Company is trying to decide whether to keep an existing machine or replace it with a...

Company is trying to decide whether to keep an existing machine or replace it with a new machine. The old machine was purchased just 2 years ago for \$40,000 and had an expected life of 12 years. It now costs \$1,300 a month for maintenance and repairs. A new machine is being considered to replace it at a cost of \$50,000. The new machine is more efficient, and it will cost only \$120 a month for maintenance and repairs. The new machine has an e peered life of 12 years. 201. In deciding to replace the old machine, which of the following is a sunk cost? (A) \$50,000 (B) \$1,300 per month (C) \$120 per month (D) \$40,000 202.

Which of the following factors would be considered when deciding whether to replace the machine? I. Any estimated salvage value of the old machine II. The lower maintenance cost of the. new machine III. The estimated salvage value of the new machine (A) I and II (B) I, II, and III C) II and III D) I and III

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O Company owns land that they could develop in the future. Olney estimates it can sell the land to Ritter Inc. for \$950,000 net of all selling costs. If the land is not sold, Olney will continue with its plans to build three single-family homes on the land. If Olney decided to develop the property, what type of cost would the potential selling price of the land represent in Olney's decision? Sunk

Incremental

Opportunity

Variable

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Which of the following budgets are appropriate for planning because they involve both fixed and variable costs?

Flexible budgets

IL Static budgets

I only

II only

Both I and II

Neither I nor II

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Flexible budgeting is limited because it is highly dependent upon an accurate identification of

fixed cost

variable cost per unit

I only

II only

Both I and II

Neither I nor II

1. Option D sunk cost would be cost of old machine I.e, \$40000 which can't be recovered if company decide to replace it.

2. Option B as all the factors will affect the decision of replacing the machine.

3. Option C as opportunity cost would be potential selling price of the land because owner will ask buyer to pay more than \$950000.

4. Option A as flexible budget is appropriate for planning because they involve both fixed and variable costs and it adjusts the changes in the volume of activity.

5. Option C as most of the time it is difficult to segregate cost between fixed and variable because many cost are not fully variable.

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