Kleen Corp owns equipment purchased a few years ago. A used equipment dealer has
ID: 2792615 • Letter: K
Question
Kleen Corp owns equipment purchased a few years ago. A used equipment dealer has offered $80,000 to buy the equipment from the company. A start-up division of Kleen wants the equipment to use in its new business. Kleen wants to charge the start-up division for the equipment. The start-up division argues that the equipment is a sunk cost and should not be charged for it--it was bought and paid for years ago. Who is right--is this a sunk cost or something else? Select the best answer.
1) Fixed cost -- dont charge the start up
2)opportunity cost -- charge the start up
3) incremental cost - charge start division
4) sunk cost -- charge the start up division
Explanation / Answer
Fixed cost: Fixed cost is a cost incurred for purchased of capital assets.
Opportunity Cost: It is a benefit foregone due to acceptance of one proposal over the other.
Sunk cost: It is a cost which is already been incurred and not change due to any action in future.
Incremental cost: It is a change in cost due to any future proposal.
In this case Kleen Corp purchased equipment few years ago. A used dealer offer $80000 to buy the equipment. If the startup division of Kleen Company use the equipment ,company will lose the opportunity of $80000 which is offered by dealer of use equipment. So Equipment cost will be treated as opportunity cost.
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