Gidget\'s Widgets is producing the maximum number of widgets which are in high d

Question

Gidget's Widgets is producing the maximum number of widgets which are in high demand. The firm is thinking of adding a second machine in order to increase production and sales. The increase in volume will be large enough to increase fixed manufacturing overhead expenses as well. Which of the following items are relevant in deciding whether to purchase a second machine?

A. Relevant,Relevant,Irrelevant

B. Irrelevant,Relevant,Irrelevant

C. Irrelevant,Irrelevant,Irrelevant

D. Relevant,Relevant,Relevant

Sales revenue Direct materials Depreciation of old machine Irrelevant Relevant Irrelevant Relevant Relevant Relevant Irrelevant Relevant Irrelevant Relevant Irrelevant Irrelevant

Explanation / Answer

A. Relevant,Relevant,Irrelevant

Incremental costs and revenue are relevant in deciding whether to purchase a second machine.

The depreciation of the old machine is irrelevant since the company will continue to depreciate the machine until the end of its useful life. Whether the company purchases the new equipment or not, it will still incur depreciation. Take note that the company has already paid for the old machine (a sunk cost)

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