Question

Concord Corporation is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine New Machine Price $370000 $740000 Accumulated Depreciation 111000 -0- Remaining useful life 10 years -0- Useful life -0- 10 years Annual operating costs $296000 $222000 If the old machine is replaced, it can be sold for $29600. Which of the following amounts is a sunk cost?

Answer 1

Answer

• Sunk Cost is that cost that is irrelevant to decision making process because it’s a past historical cost that has already been incurred.
• In the given question,
  Old machine price was $ 370,000 and Accumulated Depreciation there on is $ 111,000
  This means that Book Value of the old machine in the books of account = 370000 – 111000 = $ 259,000
• This book value is of no use in decision making because it’s a past cost.
  It is irrelevant to decision making.
  
• Sunk Cost = $ 259,000