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.
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Solution Summary
The solution explains the use of relevant costs in decision making
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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 ...
Purchase this Solution
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