Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000. Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.In making the decision to buy the model 240 machine rather than the model 310 machine, the sunk cost was:
A) $545,000
B) $450,000
C) $527,000
D) $532,000

Question

Quizplus · Accepted Answer

The sunk cost is the cost that has already been incurred and cannot be recovered, which in this case is the original purchase price of the broken machine, $527,000.

Dominik Corporation Purchased a Machine 5 Years Ago for $527,000