Question
Tommy has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that
Tommy has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and $1,000 salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and $5,000 salvage value. The operating expenses associated with the old machines are $15,000 a year.
Should Tommy keep or replace the machine, and how would that decision impact profitability?
Indicate the following:
a. Sunk cost:
b. Relevant cost:
c. Opportunity cost:
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started