Question

13.

Management of Childers Corporation is considering whether to purchase a new model 370 machine costing $447,000 or a new model 240 machine costing $402,000 to replace a machine that was purchased 7 years ago for $435,000. The old machine was used to make product M25A until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 240 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product M25A.

Management also considered, but rejected, the alternative of simply dropping product M25A. If that were done, instead of investing $402,000 in the new machine, the money could be invested in a project that would return a total of $432,000.

-$447,000

-435,000

-$432,000

-402000

Answer 1

Sunk cost is the cost which is incurred in the past and cannot be recover. The cost of the old machine which was purchased 7 years ago for $435,000 is the past cost and cannot be recovered no matter what the decision is. Thus, $435,000 is considered to be the sunk cost. Thus, Option 2, $435,000.

Any doubt comment below i will explain or resolve until you got....
PLEASE.....UPVOTE....ITS REALLY HELPS ME....THANK YOU....SOOO MUCH....
Please comment if any querry i will resolve as soon as possible