Question

Flint Corporation incurs costs of $900,000 building a custom piece of machinery for one of its customers. Prior to delivering the machine, the customer cancels the order. Flint sues the customer and is awarded $400,000 in damages. Due to the custom design of the machine, there are no other potential buyers. Flint can sell the machine as scrap for $50,000 or it can redesign the machine for $80,000, after which it could be sold for $150,000. Given the above information, and assuming Flint's cost and revenue estimates pertaining to scrapping or redesigning the machine are accurate, answer the following questions:

1. Costs irrelevant to this decision total $

Answer 1

The irrelevant costs for Flint Corporation include the sunk costs of the initial construction and lawsuit damages, totaling $900,000 and $400,000 respectively.

Step-by-step explanation:

In the decision-making process for Flint Corporation, certain costs are deemed irrelevant as they have no bearing on the current choice faced by the company. The initial $900,000 construction cost of the custom machinery and the $400,000 damages awarded from the lawsuit fall into the category of sunk costs. Sunk costs refer to expenditures that have been incurred and cannot be altered or recovered through any present or future decisions.

The $900,000 spent on constructing the custom machinery is a historical cost that is already expended, and retrieving or altering it is impossible. Similarly, the $400,000 damages awarded from the lawsuit, although a consequence of past events, represents an irretrievable cost. In the decision-making context, these sunk costs are irrelevant because they are unrelated to the future course of action.

When deciding whether to scrap or redesign the machine, it is crucial to focus on future costs and benefits rather than dwelling on expenses that cannot be altered. Relevant factors would include the projected costs of redesign, potential revenue from a redesigned product, and any ongoing operational costs associated with maintaining or scrapping the existing machinery.

By disregarding sunk costs and concentrating on future implications, Flint Corporation can make a more rational decision based on the prospective outcomes of each alternative, ensuring a more informed and strategic approach to the challenge at hand.