Share
Explore BrainMass

Relevant costs

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.

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