Answer false explanation the original price of the

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Supply Chain Management: A Logistics Perspective
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Chapter 13 / Exercise 6
Supply Chain Management: A Logistics Perspective
Coyle/Langley
Expert Verified
Answer: FALSEExplanation: The original price of the old machine and the related accumulated depreciation is a sunk cost and therefore an irrelevant cost.Diff: 1Objective: 7AACSB: Analytical thinking15) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, TurboOvens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below: ExistingNew Turbo OvenOriginal cost$60,000$50,000Accumulated depreciation$ 5,000Current salvage value$40,000Remaining life5 years5 yearsAnnual operating expenses$10,000$ 7,500Disposal value in 5 years$ 0$ 0Required:a.What costs are sunk?b.What costs are relevant?c.What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?d.What other items should Pat, as manager of the Pizzeria, consider when making this decision?
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Supply Chain Management: A Logistics Perspective
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Chapter 13 / Exercise 6
Supply Chain Management: A Logistics Perspective
Coyle/Langley
Expert Verified
Answer: a.Sunk costs include the original cost of the existing convection oven and the accompanying accumulated depreciation. b.Relevant costs include:Acquisition cost of the new Turbo ovenCurrent disposal value of the existing convection ovenDifferences in annual operating expenses for the existing and the new Turbo oven c.Net cash flows over 5 years with the new Turbo oven: Cash inflow:Decrease in annual operating expenses ($2,500 × 5)$ 12,500Sale of the existing oven40,000Cash outflow:Acquisition of the new Turbo oven(50,000)Net cash inflow (outflow)$ 2,500d.Other items the manager should consider when making this decision include:The Turbo oven's reliability and efficiency is still unknown since it is a brand-new product.If the Turbo oven bakes faster as it claims, the Pizzeria may be able to increase sales due to the quicker baking time.After purchasing another oven just six months prior, top management should consider the Turbo oven option, but instead may question the decision-making ability of Pat, the current manager. Diff: 2Objective: 7AACSB: Application of knowledge16) Why is the depreciation of an old equipment irrelevant to decision making?Answer: Depreciation cost is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost. But, the cost of purchasing new equipment in the future that will be written off as depreciation is relevant in decision making. Diff: 2Objective: 7AACSB: Analytical thinking
11.8 Objective 11.8

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