Question

Warner Corporation purchased a machine 7 years ago for $405,000 when it launched product P50. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 300 machine costing $396,350 or by a new model 200 machine costing $349,800. Management has decided to buy the model 200 machine. It has less capacity than the model 300 machine, but its capacity is sufficient to continue making product P50. Management also considered, but rejected, the alternative of dropping product P50 and not replacing the old machine. If that were done, the $349,800 invested in the new machine could instead have been invested in a project that would have returned a total of $450,600. Required: 1. What is the total differential cost regarding the decision to buy the model 200 machine rather than the model 300 machine

Answer 1

$46,550

Explanation:

Relevant data provided

New model 300 machine costing = $396,350

New model 200 Machine costing = $349,800

The computation of total differential cost is shown below:-

Total differential cost = New model 300 machine costing - New model 200 Machine costing

= $396,350 - $349,800

= $46,550

Therefore for computing the total differential cost we simply deduct the new model 200 machine costing from new model 300 machine costing