Question

Aron 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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I

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

please explain your answers. tk

Answer 1

(1) Option D is Correct

40000 spend on old machine 2 years ago is sunk cost

50000 should be considered while purchased new machine

Due to difference in maintainance cost of both the machines, there is need to be considered maintainance cost

(2) Option B is correct

Present value of salvage value should be considered for machines

Due to difference in maintainance cost of both the machines, there is need to be considered maintainance cost

(3) Option C is correct

Opportunity cost is what a person sacrifices when they choose one option over another

950000 should be considered as opportunity cost

If company choose to build the land over selling the land, then company sacrifices 950000