Lucena Corporation purchased a machine 7 years ago for $339,000 when it launched product X05K. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 360 machine costing $353,000 or by a new model 280 machine costing $332,000. Management has decided to buy the model 280 machine. It has less capacity than the model 360 machine, but its capacity is sufficient to continue making product X05K. Management also considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If that were done, the $332,000 invested in the new machine could instead have been invested in a project that would have returned a total of $426,000.
130. In making the decision to buy the model 280 machine rather than the model 360 machine, the differential cost was:
<underLine>A.</underLine> $21,000
B. $87,000
C. $7,000
D. $14,000
-In making the decision to buy the model 280 machine rather than the model 360 machine, the sunk cost was:

Question

Lucena Corporation purchased a machine 7 years ago for $339,000 when it launched product X05K. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 360 machine costing $353,000 or by a new model 280 machine costing $332,000. Management has decided to buy the model 280 machine. It has less capacity than the model 360 machine, but its capacity is sufficient to continue making product X05K. Management also considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If that were done, the $332,000 invested in the new machine could instead have been invested in a project that would have returned a total of $426,000.
130. In making the decision to buy the model 280 machine rather than the model 360 machine, the differential cost was:
<underLine>A.</underLine> $21,000
B. $87,000
C. $7,000
D. $14,000

-In making the decision to buy the model 280 machine rather than the model 360 machine, the sunk cost was:

Quizplus · Accepted Answer

The differential cost is calculated by subtracting the cost of the model 280 machine from the cost of the model 360 machine. Therefore, the differential cost is $353,000 - $332,000 = $21,000 (option A).

Answer: B
 The sunk cost is the cost that has already been incurred and cannot be recovered. In this case, the sunk cost is the original cost of the old machine, which was $339,000 (option B).

Based on the information given, the best choice would be to buy the model 280 machine as it is less expensive and has sufficient capacity to continue making product X05K. Additionally, dropping the product and investing in another project would not be the best option as it would result in a loss of the original investment in the old machine and would only yield a return of $426,000, which is less than the cost of either new machine.

Lucena Corporation Purchased a Machine 7 Years Ago for $339,000