John\'s 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 t
ID: 2486187 • Letter: J
Question
John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars:
Trail Blazer Grand Cherokee
Acquisition cost $25,000 $6,000
Repairs $ 6,000
Annual operating costs
(Gas, maintenance, insurance) $ 2,280 $2,100
Which one is RELEANT and IRRELEVANT for this decision? WHY??
A. Acquisition cost of the Trail Blazer
B. Acquisition cost of the Grand Cherokee
C. Rpairs to the Trail Blazer
D. Annual operating costs of the Grand Cherokee
Explanation / Answer
Answer: Relevant cost=$D. Annual operating costs of the Grand Cherokee
Because it is incurred in future.
Irrevalent cost=A. Acquisition cost of the Trail Blazer
Because it is sunk cost.
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