A pulpwood-forming machine was purchased and installed 8 years ago for $45,000. The declared salvage value was $5,000, with a useful life of 10 years. The machine can be replaced with a more efficient model that costs $75,000, including installation. The present machine can be sold on the open market for $14,000. The cost to remove the old machine is $2,000. Which are the relevant costs for the old machine?
This term is used in managerial accounting where the companies find out the avoidable costs while making business decisions. This is done to smoothen the decision making by providing only relevant data.
Answer and Explanation:
- The cost to remove the old machine = $75,000
- Purchase price of a new machine = $2,000
Relevant cost for the old machine is= The cost to remove old machine + Purchase price of a new machine
So, relevant cost = $75,000+$2,000 = $77,000
Relevant cost is the avoidable cost so by continuing with the present machine we can avoid the cost of $77,000
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from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12