Management of Childers Corporation is considering whether to purchase a new model 380 machine costing $278,000 or a new model 230 machine costing $207,000 to replace a machine that was purchased 3 years ago for $266,000. The old machine was used to make product R16K until it broke down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 230 machine. It has less capacity than the new model 380 machine, but its capacity is sufficient to continue making product R16K.
Management also considered, but rejected, the alternative of simply dropping product R16K. If that were done, instead of investing $207,000 in the new machine, the money could be invested in a project that would return a total of $305,000.
In making the decision to buy the model 230 machine rather than the model 380 machine, the sunk cost was:
A)$305,000
B)$266,000
C)$278,000
D)$207,000

Question

Quizplus · Accepted Answer

The sunk cost is the cost of the old machine, which was purchased 3 years ago for $266,000. This cost is irrelevant to the decision of whether to purchase the new model 230 or new model 380 machine. Therefore, the best choice is to purchase the new model 230 machine as it is sufficient to continue making product R16K and is less expensive than the new model 380 machine. Rejecting product R16K for the alternative project would result in a loss of potential profits from continuing to sell the product.

Management of Childers Corporation Is Considering Whether to Purchase a New