2. Pace Corporation in Cookeville, Tennessee bought production equipment 2 years

Question

2. Pace Corporation in Cookeville, Tennessee bought production equipment 2 years ago for S38,000. The equipment was expected to last for 5 years and the salvage value was estimated to be S4,000 at the end of its useful life. Unfortunately, the equipment did not perform satisfactorily and the company spent $15,000 a year ago. It is recommended by the plant engineer that the equipment be either upgraded now for another S12,000 or replaced with equipment now. If the equipment is replaced now, it can be sold for S8,000. In conducting a replacement analysis, the cost of the defender to be used is equal to: (10 pts, no partial credit) B. $35,000 D. $8,000 C. $27,000 A. $38,000

Explanation / Answer

Sunk cost: A cost that has as of now been brought about and in this way can't be recuperated. A sunk cost varies from other, future costs that a business may face, for example, stock expenses or R&D costs, since it has as of now happened. Sunk expenses are free of any occasion that may happen later on. Unmistakably, there is no hope about the $15000 and $12000 officially spent and consequently they are sunk expenses

ANSWER IS

c. $8,000 Since the earlier costs are sunk costs.

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