Question

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Question 44 Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: Old Machine Replacement Machine $45,000 $35.000 5 Original cost Remaining useful life in years Current age in years Book value 5 0 5 $25,000 $8,000 Current disposal value in cash Future disposal value in cash (in 5 years) Annual cash operating costs $0 $0 $7,000 $4,000 For a machine replacement decision which of the information provided in the table is a sunk cost? The current annual operating cost of the old machine The current disposal value of the old machine The price of the new machine The original cost of the old machine

Answer 1

Question No 44.

Answer is Option C- The original cost of the old machine.

Sunk Cost:
Sunk costs reffred to money that has already been spent and which cannot be recovered. In business sunk costs are typically not included in consideration when making future decisions , as they seems as irrelevant to current and budgetary decisions  

The original cost of old machine has no relevance in decision making about purchase of new machinery in the place of old machinery . This expenditure is already spent in 5 years ago . So it has no relevance in decision making

Question No 50

Answer is Option B - Direct Material

Merchandiser : Merchandiser is business that purchases inventory and resells it to its customers for a profit. Retailers and Wholesalers are good examples of merchandisers becuase they tipically buy the goods from manfacturers and sell them to public conusmers. They Purchase final products from manfacturers those required no furthur processing . So they dont nedd to incur any Processing expenses like labour , Operationg Expenses .

So In the given question they asking which expenses is common to both manfacturer and merchandiser . Manfactuerer will incurr many expenses but merchandiser will incurr only one expense . that is Direct Material.For Both Manfacturer and merchandiser common expenses will be Direct Material.