Brewton Freight Company owns a truck that cost $31,000. Currently, the truck\'s

Question

Brewton Freight Company owns a truck that cost $31,000. Currently, the truck's book value is $22,000, and its expected remaining useful life is four years. Brewton has the opportunity to purchase for $29,000 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $5,100 per year more than fuel cost for the new truck. The old truck is paid for but, in spite of being in good condition, can be sold for only $19,000. Required Calculate the total relevant costs. Answer is complete but not entirely correct. Keep Old Replace With New Total relevant costs $ 10,600 $ 7,250> Should Brewton replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out? °Continue to use the old truck OReplace the old truck

Explanation / Answer

Part 1 Calculation of Total Relevant costs (Amount in $)

20,400

($5,100 per year*4 yrs)

Relevant cost includes only costs that are relevant for decision making and which is different in the given alternatives. In this case additional fuel cost is future cost and old truck's fuel cost per year is higher than new truck's fuel cost by $5,100. As the remaining useful life of old truck is four years, the additional fuel cost of four years is considered as relevant cost.

Part 2 : As total relevant cost is lower if truck is replaced with new one, thus Brewton should replace the old truck with the new fuel efficient model.

Particulars Keep Old Replace With New Additional Fuel cost for four years

20,400

($5,100 per year*4 yrs)

- Purchase cost of new truck - 29,000 Less: Sale of old truck - (19,000) Total relevant costs 20,400 10,000

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