Please indicate which of the following are relevant costs for decision making. Also indicate if the...

Please indicate which of the following are relevant costs for decision making. Also indicate if the cost is a sunk cost, opportunity cost, or an out of pocket cost, and your reasoning.

a. The annual cost of Rent for your factory-You are debating discontinuing the product you manufacture. You are in the middle of a 10 year lease, and there is no option to terminate the lease early.

b. The cost of the specialized Machines in your factory, You are debating whether to discontinue production of the product involved and buy the product from a supplier instead.

c. The salvage value of the specialized Machinery in your factory from b. above. The salvage value is equal to 20% of the original cost of the Machinery and will be realized if production is discontinued.

d. The cost of a new oil burner that replaced a destroyed one.

e. The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one.

f. Depreciation expense on the old oil burner in e. above.

g. The manufacturing cost for some defective inventory you produced, that you now have to decide whether to rework or scrap.

Expert Solution

a) Annual cost of rent in case the tease can not be terminated will be an out of pocket expense as it is a direct payment of money that may or may not be later reimbursed from a third-party source. relevant

b) Cost of machine is a sunk cost because it has already been incurred and can not be reimbursed or recovered. relevant

c) salvage value is none of these as it is deducted from the cost of the machinery that is considered as sunk cost. relevant

d) The cost of a new oil burner that replaced a destroyed one is a sunk cost as it has already been incurred and can not be reimbursed or recovered. relevant

e) The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one is an opportunity cost as it is the loss of other alternatives when one alternative is chosen. relevant

f) Depreciation expense on the old oil burner is irrelevant as it does not matter after old machine is replaced.

g) The manufacturing cost for some defective inventory you produced, that you now have to decide whether to rework or scrap are out of pocket cost as it is a direct payment of money that may or may not be later reimbursed from a third-party source. relevant

ekkarill92 answered 2 years ago

Are opportunity costs relevant to decision making?

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