Question

Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $523,000 or a new model 220 machine costing $482,000 to replace a machine that was purchased 7 years ago for $518,000. The old machine was used to make product 143L 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 143L Management also considered, but rejected, the alternative of simply dropping product 143L. 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 $497,000. In making the decision to buy the model 220 machine rather than the model 370 machine, the sunk cost was:
A. $518,000
B. $482,000
C. $523,000
D. $497000

Answer 1

Answer:

A. $518,000

Explanation:

The computation of the sunk cost is shown below:

= Purchase value of the machine that buys 7 years ago

= $518,000

As sunk cost is the cost that already spent and not relevant for decision making

So according to the given options, the first option is correct