A pulpwood-forming machine was purchased and installed 8 years ago for $45,000. The declared...

Question:

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?

Relevant cost:

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


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
1.3K

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