In making the decision to buy the model 240 machine rather than the model 310 machine, the sunk cost was:
A) $545,000
B) $450,000
C) $527,000
D) $532,000
Answer: C
Explanation: Sunk cost = Cost of old machine = $527,000
Difficulty: 1 Easy
Topic: Cost Classifications for Decision Making
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Decision Making
259) Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000. Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.
In making the decision to invest in the model 240 machine, the opportunity cost was:
A) $545,000
B) $450,000
C) $532,000
D) $527,000
Answer: C
Explanation: Opportunity cost = Return from alternative investment = $532,000
Difficulty: 1 Easy
Topic: Cost Classifications for Decision Making
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Decision Making
260) 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
Answer: A
Explanation: Sunk cost = Cost of old machine = $348,000
Difficulty: 1 Easy
Topic: Cost Classifications for Decision Making
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Decision Making
261) 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 differential cost was:
A) $20,000
B) $8,000
C) $12,000
D) $63,000
Answer: A
Explanation: Differential cost = $360,000 − $340,000 = $20,000
Difficulty: 1 Easy
Topic: Cost Classifications for Decision Making
Learning Objective: 01-05 Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.
Bloom's: Apply
AACSB: Analytical Thinking