Noel Stewart Bought a Machine Two Years Ago for £500

question 10

Multiple Choice

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.
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In this decision, Noel would consider the sunk cost to be

• A)£50.
• B)£650.
• C)£700.
• D)£500.

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Definitions:

Appreciation

An increase in the value of an asset over time, which can result from various factors including inflation, increased demand, or improvements to the asset.

Interest Rates

The percentage charged on borrowed money, or earned through investment, over a certain period of time.

Inflation Rate

The percentage rate at which the general level of prices for goods and services is rising, eroding purchasing power over time.

Demand

The willingness and ability of consumers to purchase goods or services at a given price level.