Question

Please do all the requirements

Ignore the effect of income taxes and the time value of money.
Which of the costs and benefits above are relevant to the decision to replace the oven?
What information is irrelevant? Why is it irrelevant?
Should Oma's Bakery purchase the new oven? Provide support for your answer.
Is there any conflict between the decision model and the incentives of the manager who has purchased the "old" oven and is considering replacing it only 2 years later?
At what purchase price would Oma's Bakery be indifferent between purchasing the new oven and continuing to use the old oven?

Answer 1

The relevant costs and benefits to consider when deciding to replace the oven at Oma's Bakery and the potential conflict between the decision model and the manager's incentives.

Step-by-step explanation:

The relevant costs and benefits to consider when deciding to replace the oven at Oma's Bakery include the cost of the new oven, any savings in energy costs or maintenance expenses, and the potential increase in productivity or quality of baked goods. The irrelevant information would be any sunk costs, such as the initial purchase price of the old oven, as these costs cannot be recovered and should not impact the decision. To determine whether Oma's Bakery should purchase the new oven, a thorough cost-benefit analysis should be conducted by comparing the costs and benefits discussed earlier. The decision model and the incentives of the manager who purchased the old oven may conflict if the manager feels personally attached to the initial purchase or fears criticism for replacing it too soon. The purchase price at which Oma's Bakery would be indifferent between purchasing the new oven and continuing to use the old oven would vary depending on the specific costs and benefits involved.