Explore BrainMass

Explore BrainMass

    Relevant costs

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    See attached file for full problem description.

    1. Which costs are irrelevant?
    2. Which alternative should Paul choose? Support your decision with only relevant numbers.

    Paul Smith is considering replacing Jones & Smith's present dishwasher with a new energy-efficient model.
    Although the old dishwasher has a present book value of $1000, its current market value is $2000 and if held for five more years, this would drop to $300.
    If Paul decides not to buy the new machine, approximately $500 of repairs must be performed on the present dishwasher.
    The following is a schedule of expected annual expenses foe each option over the next five years.

    Kepp Present Dishwasher Buy New Dishwasher
    Maintenance $400 $200
    Labor 12000 12000
    Energy 800 500
    Water 400 400

    The new machine would cost $7000 and is expected to have a salvage value of $2000 at the end of five years.

    Q:
    1. Which costs are irrelevant?
    2. Which alternative should Paul choose? Support your decision with only relevant numbers.

    © BrainMass Inc. brainmass.com June 3, 2020, 8:21 pm ad1c9bdddf
    https://brainmass.com/business/accounting/134140

    Attachments

    Solution Preview

    Paul Smith is considering replacing Jones & Smith's present dishwasher with a new energy-efficient model.
    Although the old dishwasher has a present book value of $1000, its current market value is $2000 and if held for five more years, this would drop to $300.
    If Paul decides not to buy the new machine, approximately $500 of repairs must be performed ...

    Solution Summary

    The solution explains the use of relevant costs in decision making

    $2.19

    ADVERTISEMENT