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Management of Childers Corporation Is Considering Whether to Purchase a New

question 113

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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 invest in the model 230 machine, the opportunity cost was:

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Definitions:

Good

An item or product that can be bought, sold, or traded, contributing to an economy's wealth or resources.

Monopsonist

A market condition in which there is only one buyer for a product or service, giving the buyer substantial power over prices.

Maximizing Profit

The process or strategy implemented by a company to ensure that they achieve the highest possible financial gain from their operations, taking into account both revenue and costs.

Marginal Value Curve

A curve showing how the value or utility of consuming an additional unit of a good changes as the quantity consumed changes.