Berkman Company is considering the purchase of new equipment to replace one-year-old equipment that is not achieving the expected results.The following information is available: Which of these items is NOT relevant to this decision?
$$\begin{array} { l l }
\text { Expected maintenance costs of new machine } & \$ 13,000 \text { per year } \
\text { Purchase price of existing machine } & \$ 160,000 \
\text { Expected cost savings of new machine } & \$ 30,000 \text { per year } \
\text { Expected maintenance costs of exi sting machine } & \$ 8,000 \text { per year } \
\text { Resale value of existing machine } & \$ 45,000
\end{array}$$
A)the expected maintenance costs of the new machine
B)the purchase cost of the existing machine
C)the expected maintenance costs of the existing machine
D)the expected resale value of the existing machine

Question

Berkman Company is considering the purchase of new equipment to replace one-year-old equipment that is not achieving the expected results.The following information is available: Which of these items is NOT relevant to this decision?
$$\begin{array} { l l } 
\text { Expected maintenance costs of new machine } & \$ 13,000 \text { per year } \
\text { Purchase price of existing machine } & \$ 160,000 \
\text { Expected cost savings of new machine } & \$ 30,000 \text { per year } \
\text { Expected maintenance costs of exi sting machine } & \$ 8,000 \text { per year } \
\text { Resale value of existing machine } & \$ 45,000
\end{array}$$
A)the expected maintenance costs of the new machine
B)the purchase cost of the existing machine
C)the expected maintenance costs of the existing machine
D)the expected resale value of the existing machine

Quizplus · Accepted Answer

The purchase price of the existing machine is a sunk cost and not relevant to the decision of whether to replace it with a new machine. Relevant costs are those that will change as a result of the decision.

Berkman Company Is Considering the Purchase of New Equipment to Replace