Question

A boat, costing $108,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $11,000 cash and be replaced with a similar boat costing $110,000, or rebuilt for $98,000 and be brand new as far as operating characteristics and looks are concerned. A relevant cost analysis of the decision to replace the boat shows:

A cost equivalence between the two decision options.

An $11,000 net advantage associated with the decision to fix the old boat.

A $1,000 cost advantage associated with the decision to fix the old boat.

A $21,000 cost advantage associated with the decision to fix the old boat.

A $2,000 cost advantage associated with the decision to purchase a new boat.

Answer 1

A $1,000 cost advantage associated with the decision to fix the old boat.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

Dispose amount = $11,000

Replacement boat = $110,000

Rebuilt of boat = $98,000

So, we can calculate the cost advantage by using following formula:

Cost of new boat = replacement boat amount - Dispose amount

= $110,000 - $11,000

= $99,000

So, cost advantage = Cost of new boat - Rebuilt of boat

= $99,000 - $98,000

= $1,000

So, this shows that rebuilt the old boat is preferable because it will cost $1000 less.

Hence, $1,000 cost advantage associated with the decision to fix the old boat.