Question

Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $443,000 or a new model 220 machine costing $404,000 to replace a machine that was purchased 12 years ago for $411,000. 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 $404,000 in the new machine, the money could be invested in a project that would return a total of $432,000.

In making the decision to buy the model 220 machine rather than the model 370 machine, the sunk cost was

Multiple Choice

$411,000

$404,000

$443,000

$432,000

Answer 1

Correct answer is option a. $411,000

Sunk Cost is a cost that has been already being incurred by the company and it cannot be reversed irrespective of the management decision. So in the given case as the machine was purchased 12 years ago it is the sunk cost.

Hence sunk cost is $411,000