Question

warner corporation purchased a machine seven years ago for $405,000 when it launched product p50. unfortunately, this machine has broken down and cannot be repaired. the machine could be replaced by a new model 300 machine costing $396,350 or by a new model 200 machine costing $349,800. management has decided to buy the model 200 machine. it has less capacity than the model 300 machine, but its capacity is sufficient to continue making product p50. management also considered, but rejected, the alternative of dropping product p50 and not replacing the old machine. if that were done, the $349,800 invested in the new machine could instead have been invested in a project that would have returned a total of $450,600
required:
1 what is the total differential cost regarding the decision to buy the model 200 machine rather than the model 300 machine?

1. what is the total sunk cost regarding the decision to buy the model 200 machine rather than the model 300 machine?
2. what is the total opportunity cost regarding the decision to invest in the model 200 machine?

Explanation:

Step1: Calculate differential cost

Subtract Model 200 cost from Model 300 cost.
$\$396,350 - \$349,800 = \$46,550$

Step2: Identify sunk cost

Sunk cost is the unrecoverable old machine cost.
$\$405,000$

Step3: Identify opportunity cost

Opportunity cost is the project's total return.
$\$450,600$

Answer:

1. Differential cost: $\$46,550$
2. Sunk cost: $\$405,000$
3. Opportunity cost: $\$450,600$