Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{lrr}&\text {Old Machine }&\text {New Machine }\
\text { Price } & \$ 300,000 & \$ 600,000 \
\text { Accumulated Depreciation } & 90,000 & -0- \
\text { Remaining useful life } & 10 \text { years } & -0- \
\text { Useful life } & -0- & 10 \text { years } \
\text { Annual operating costs } & \$ 240,000 & \$ 180,600
\end{array}$ If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is a sunk cost?
A) $240,000
B) $180,600
C) $600,000
D) $210,000

Question

Quizplus · Accepted Answer

Sunk costs are past costs that cannot be recovered. The accumulated depreciation of $90,000 and the original price of the old machine ($300,000) are sunk costs because they are past expenses that cannot be recovered regardless of future actions. The calculation for the sunk cost is $300,000 (original price) - $90,000 (accumulated depreciation) = $210,000. The other options represent future costs or the cost of the new machine, which are not considered sunk costs.

Sala Co Is Contemplating the Replacement of an Old Machine with with a New