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# Relevant costs

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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.

#### 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

\$2.49