Question

Please indicate which of the following are relevant costs for decision making. Also indicate if the cost is a sunk cost, opportunity cost, or an out of pocket cost, and your reasoning. a. The annual cost of Rent for your factory-You are debating discontinuing the product you manufacture. You are in the middle of a 10 year lease, and there is no option to terminate the lease early. b. The cost of the specialized Machines in your factory, You are debating whether to discontinue production of the product involved and buy the product from a supplier instead. c. The salvage value of the specialized Machinery in your factory from b. above. The salvage value is equal to 20% of the original cost of the Machinery and will be realized if production is discontinued. d. The cost of a new oil burner that replaced a destroyed one. e. The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one. f. Depreciation expense on the old oil burner in e. above. g. The manufacturing cost for some defective inventory you produced, that you now have to decide whether to rework or scrap.

Answer 1

a) Annual cost of Rent is a sunk cost and Not relavant for decision making because we had already been entered into a lease agreement and it will never be terminated

b) Cost of specialized machinery is sunk cost and not relavant for decision making, because machinery cost already been incurred in past

c) Salvage value of machinery is oppurtunity cost, if we discontinue the business and it is relavant for decision making

'd) The cost of new oil burner is an out of pocket expense and Relavant cost for decision making

e)The cost of old inefficient oil burner is a sunk cost, because  this is already incurred in past

f) Depreciation expense is not a Relavant Cost, It is used for decision making

g) the manufacturing cost incurred for defective meterial is not a Relavant Cost