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Warner Corporation purchased a machine 7 years ago for $337,000 when it launched product P50. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 300 machine costing $326,800 or by a new model 200 machine costing $279,000. Management has decided to buy the model 200 machine. It has less capacity than the model 300 machine, but its capacity is sufficient to continue making product P50. Management also considered, but rejected, the alternative of dropping product P50 and not replacing the old machine. If that were done, the $279,000 invested in the new machine could instead have been invested in a project that would have returned a total of $395,000. Required: 1. What is the total differential cost regarding the decision to buy the model 200 machine rather than the model 300 machine? 2. What is the total sunk cost regarding the decision to buy the model 200 machine rather than the model 300 machine? 3. What is the total opportunity cost regarding the decision to invest in the model 200 machine?

Respuesta :

Answer:

1. $47,800

2. $337,000

3. $395,000

Explanation:

1. The differential cost is the difference between the alternatives chosen. It is computed below:

= Replacing cost - new machine costing

= $326,800 - $279,000

= $47,800

2.  The sunk cost is that cost which is not recovered. It is a past cost. In the given question, the machine was purchased seven years ago for $337,000. So, this is a sunk cost

3. The opportunity cost is that cost which is best from the given choices. So, the $395,000 is an opportunity cost as it provides a return of total $395,000

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