Question

"Management of Modugno Corporation is considering whether to purchase a new model 370 machine costing $496,000 or a new model 240 machine costing $481,000 to replace a machine that was purchased 6 years ago for $486,000. The old machine was used to make product M25A until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 240 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product M25A.

Management also considered, but rejected, the alternative of simply dropping product M25A. If that were done, instead of investing $481,000 in the new machine, the money could be invested in a project that would return a total of $483,000.



$5,000"
In making the decision to buy the model 240 machine rather than the model 370 machine, the differential cost was:
1) $10,000
2) $15,000
3) $-3,000
4) $5,000

Answer 1

The differential cost of choosing the model 240 machine instead of the model 370 machine is $15,000.

Step-by-step explanation:

In making the decision to buy the model 240 machine rather than the model 370 machine, the differential cost was $5,000.

To calculate the differential cost, we need to subtract the cost of the new machine that was chosen from the cost of the alternative investment. The cost of the new machine is $481,000, and the alternative investment would return $483,000. Therefore, the differential cost is $483,000 - $481,000 = $2,000.

However, since we are considering the decision to buy the model 240 machine instead of the model 370 machine, we need to take into account the cost of the model 370 machine as well. The cost of the model 370 machine is $496,000. Therefore, the differential cost is $496,000 - $481,000 = $15,000. Hence, the correct answer is 2) $15,000.