Warner Corporation purchased a machine 7 years ago for $330,000 when it launched
ID: 2537102 • Letter: W
Question
Warner Corporation purchased a machine 7 years ago for $330,000 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 $323,400 or by a new model 200 machine costing $286,600. Management has decided to buy the 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 $286,600 invested in the new machine could instead have been invested in a project that would have returned a total of $393,000.
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?
Explanation / Answer
Answer 1 : Total Differntial Cost to buy 200 Machine rather than the 300 Machine:
Diferential cost is like the names suggest difference in cost by selecting the one option in place of another.
So the differntial amount between 2 Machines is :
=$323400 - $286600
=$36800
Difffertial Cost is $36800
Answer 2 : Total Sunk COst :
Sunk cost is cost that is already incurred and cannot be changed by any decision, the cost of $330000 which was puted in old machinery 7 years ago is called the sunk cost.
Sunk Cost $330000
Answer 3: Oppurtunity Cost is potenitial benfit that is not generated due to selecting the alternatiove option, if the amout of $ 286600 is not invested in new Machine & rather invested in a project would have returned $39300 that is Oppurtunity cost
Oppurtunity COst is $ 393000
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