RIGO CORPORATION

Consider each part independently.

Part One

The RIGO Meat Corporation is considering whether it should replace an old machine. The new machine will produce 25% more units than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling costs will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold for a residual value. The old machine requires frequent maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid by cash.

REQUIRED:

For each of the following costs, indicate whether the cost is a differential (incremental) cost, a sunk (irrelevant) cost, or neither. Explain each of your answers.

1. Cost of new machine

2. Cost of old machine

3. Fixed selling costs

4. Variable selling costs

5. Maintenance cost of new machine

6. Maintenance costs of old machine

Part Two

The RIGO Corporation currently makes two types of chairs, Alpha and Beta. The company now has an opportunity to make a third chair, Gamma. In doing so, it will forgo some of the Beta. Very briefly explain what is an opportunity cost in this example.