Question

The City of San Diego is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs.
Which of the following items, all related to the transaction, would not be considered in the decision?

a. Purchase price of the new vehicle.
b. Purchase price of the old vehicle.
c. Savings in operating costs as a result of the new vehicle.
d. Proceeds from disposal of the old vehicle.

Answer 1

Answer:

B. Purchase Price of the Old Vehicle

Explanation:

Step 1: Consider the relevant transaction from the old vehicle

The Purchase price of the old vehicle is considered a historical cost and in most situations, especially for accounting purposes, this amount has undergone depreciation from the very first year the old vehicle was bought.

Instead of concentrating on the purchase price of the old vehicle, the only transaction from that old vehicle that is worth considering is the Proceeds from its disposal which can serve as part of the payment for the new fire truck to be purchased.

Step 2: Consider the relevant transactions for the new vehicle

One of the very first transactions that are relevant for the new vehicle is the purchase price. A very expensive new fire truck can cancel out the benefits of its acquisition since the main essence of acquisition is to save cost.

Step 3: Consider the Expected Operating Expenses that can be saved by the new truck

This the main reason advanced by the CIty of San Diego to get a new fire truck. Hence, a fire truck that tends to increase maintenance and operating cos will not fit into the decision.

Based on these explanations, therefore, the only transaction that is not relevant to this decision is the purchase price of the old vehicle