Asked by reddy chittamuru on May 04, 2024
Verified
Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $360,000 or a new model 220 machine costing $340,000 to replace a machine that was purchased 7 years ago for $348,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $340,000 in the new machine, the money could be invested in a project that would return a total of $411,000.In making the decision to buy the model 220 machine rather than the model 370 machine, the sunk cost was:
A) $348,000
B) $340,000
C) $360,000
D) $411,000
Sunk Cost
A cost that has already been incurred and cannot be recovered, and hence should not influence future business decisions.
- Digest and leverage the understanding of sunk cost, opportunity cost, and differential cost for strategic business decision-making.
Verified Answer
FO
Friska OliviaMay 07, 2024
Final Answer :
A
Explanation :
The sunk cost in this scenario is the cost of the old machine that has been purchased 7 years ago and is no longer usable. It is not part of the decision making process for purchasing a new machine as it has already been incurred and cannot be recovered. Therefore, the best choice is to buy the new model 220 machine as it is sufficient to continue making product I43L and investing the remaining money in the project that would return a total of $411,000. This would provide the highest return on investment for the company.
Learning Objectives
- Digest and leverage the understanding of sunk cost, opportunity cost, and differential cost for strategic business decision-making.