Question

Breezy Company is considering the replacement of equipment that has a current book value of $405,000. Breezy has an opportunity to sell the equipment for $305,000. The cost of replacing the old equipment with a new machine is $365,000. The cost of operating the new equipment is $46,000 per year less than the cost of operating the old equipment. The new equipment has a 5-year useful life. The amount of the sunk cost for this replacement decision is?

A) $405,000

B) $305,000

C) $365,000

D) $46,000

Answer 1

Sunk cost = Cost already incurred which is not relevant for decision making

Here, sunk cost is the current book value of equipment

= 405,000

OPTION A IS THE ANSWER