Explore BrainMass

Operating Costs - Sunk Cost and Relevant Costs

The following information applies to all parts:

A business is considering replacing its existing van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing Van New Van
Original cost $100,000 $180,000
Annul operating cost $35,000 $20,000
Accumulated depreciation $60,000 ----
Current salvage value of the existing van $45,000 ----
Remaining life 10 years 10 years
Salvage value in 10 years $ 0 $ 0
Annul depreciation $4,000 $18,000 -

1) Sunk costs include____________.

the original cost of the existing van, the original costs of the new van, the current salvage value of the existing van, or the annual operating cost of the new van

2) Relevant costs for this decision include _________.

the original cost of the existing van, accumulated depreciation, the current salvage value, or the salvage value in 10 years

3) Costs are relevant to a particular decision if they ________.

are variable costs, differ across the alternatives being considered, are fixed costs, or remain unchanged across the alternatives being considered

Solution Preview

1) Sunk costs include____________.

Answer : the original cost of the existing van .

Sunk Costs should not be included in a decision. ...