Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000. In making the decision to buy the model 260 machine rather than the model 330 machine, the sunk cost was:
A)$418,000
B)$456,000
C)$474,000
D)$496,000

Question

Quizplus · Accepted Answer

The sunk cost in this scenario is the $456,000 that was originally paid for the broken machine. This cost cannot be recovered and should not be factored into the decision-making process.

The best choice is to purchase the model 260 machine, as it is less expensive and still has sufficient capacity to continue making product G92L. The alternative of dropping the product and investing in a separate project may have a higher return on investment, but it does not address the need to replace the broken machine for the production of product G92L. Therefore, it is not a viable option in this scenario.

Dechico Corporation Purchased a Machine 3 Years Ago for $456,000