Question

Management of Childers Corporation is considering whether to purchase a new model 370 machine costing $536,000 or a new model 240 machine costing $463,000 to replace a machine that was purchased 9 years ago for $484,000. The old machine was used to make product M25A until it broke down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 240 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product M25A. Management also considered, but rejected, the alternative of simply dropping product M25A. If that were done, instead of investing $463,000 in the new machine, the money could be invested in a project that would return a total of $488,000. In making the decision to buy the model 240 machine rather than the model 370 machine, the differential cost was:

Answer 1

Differential cost = $73,000

Step-by-step explanation:

When management had to decide which machine to buy, the differential costs refers to the difference in cost between the two available options. Model 370 costs $536,000 while model 240 costs $463,000. The differential cost = $536,000 - $463,000 = $73,000.