Check my work Warner Corporation purchased a machine 7 years ago for $373,000 wh

Question

Check my work Warner Corporation purchased a machine 7 years ago for $373,000 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 $364,450 or by a new model 200 machine costing $313,200. Management has decided to buy t he 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 $313,200 invested in the new machine could instead have been invested in a project that would have returned a total of $421,200. 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? cost ng MacBook Pro

Explanation / Answer

Answer:

1

Differential cost

51250

2

Sunk cost

373000

3

Opportunity cost

421200

Working notes for the above answer is as under

1

TCost of a new model 300 (a)

364450

Cost of a new model 200 (b)

313200

Differential cost (a) – (b)

51250

The differential cost is computed as follows: Cost of new model – Cost of new model

2

The sunk cost is the cost of the machine purchased seven years ago for $373,000

3

The opportunity cost is the $421,200 that could have been earned by pursuing the forgone option.

1

Differential cost

51250

2

Sunk cost

373000

3

Opportunity cost

421200

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