Management of Childers Corporation Is Considering Whether to Purchase a New

question 160

Multiple Choice

Management of Childers Corporation is considering whether to purchase a new model 380 machine costing $278,000 or a new model 230 machine costing $207,000 to replace a machine that was purchased 3 years ago for $266,000. The old machine was used to make product R16K until it broke down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 230 machine. It has less capacity than the new model 380 machine, but its capacity is sufficient to continue making product R16K.
Management also considered, but rejected, the alternative of simply dropping product R16K. If that were done, instead of investing $207,000 in the new machine, the money could be invested in a project that would return a total of $305,000.
In making the decision to buy the model 230 machine rather than the model 380 machine, the sunk cost was:

• A)$305,000
• B)$266,000
• C)$278,000
• D)$207,000

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Definitions:

Consumption

The use of goods and services by households or individuals for personal satisfaction or to fulfill needs.

Mercedes

A German global automobile marque known for luxury vehicles, buses, coaches, and trucks.

Income

Regularly received financial returns from participation in work or through the investment of capital.

Buicks

A brand of automobiles produced by the American automotive manufacturer General Motors (GM), known for its range of sedans, SUVs, and crossovers.