A company owns equipment that is used to manufacture important parts for its production process.Because the equipment is repeatedly breaking down,the company plans to sell the equipment for $10,000 and to select one of the following alternatives: (1)acquire new equipment for $80,000 and continue to manufacture the part at the same variable cost,or (2)purchase the parts from an outside company at $4 per part.In the short run the company should quantitatively analyze the alternatives by comparing the variable cost of manufacturing the parts:
A)Plus $80,000,to the cost of buying the parts.
B)To the cost of buying the parts less $10,000.
C)Less $10,000 to the cost of buying the parts.
D)To the cost of buying the parts.

Question

Quizplus · Accepted Answer

The company should compare the variable cost of manufacturing the parts to the cost of buying the parts directly, without considering the $10,000 from selling the old equipment, as it is a sunk cost in this decision.

A Company Owns Equipment That Is Used to Manufacture Important