Pat, a Pizzeria Manager, Replaced the Convection Oven Just Six

question 141

Essay

Pat, a pizzeria manager, replaced the convection oven just six months ago.Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses.Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased.Selected information about the two ovens is given below:
Required:
a.What costs are sunk?
b.What costs are relevant?
c.What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?
d.What other items should Pat, as manager of the Pizzeria, consider when making this decision?

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Definitions:

Opportunity Cost

Incurring a cost by overlooking the next most advantageous option when making choices.

Investment

The allocation of resources, usually money, into something with the expectation of generating income or profit in the future.

Capital

Assets used in the production of goods and services, such as machinery, buildings, or tools.

Production Efficiency

A situation where the economy is utilizing all of its resources efficiently, producing what people want at the lowest possible cost.