Question

Sala co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is a sunk cost?

1) $24,000
2) The cost of the new machine
3) The cost of selling the old machine
4) The potential revenue from selling the old machine

Answer 1

The potential revenue from selling the old machine represents a sunk cost, as it relates to past expenditures that cannot be recovered and should not influence the current decision regarding equipment replacement.

Step-by-step explanation:

The concept being discussed is sunk costs, which is highly relevant in business decisions, especially when contemplating equipment replacement or other capital investments. A sunk cost refers to money already spent that cannot be recovered, and as such, should not influence future business decisions. In the context of the question provided, the $24,000 from selling the old machine is not a sunk cost, because it is a potential future inflow that affects the decision. The cost of the new machine will be relevant for making the decision, but it is not a sunk cost either. Selling costs associated with the old machine can be a cash outflow due to the decision, but they are not sunk costs. Therefore, it is the potential revenue from selling the old machine that is a sunk cost, as it is a past cost related to the acquisition of the old machine that cannot be affected by the future decision of replacement.