Keep or Buy, Sunk Costs
Heather Alburty purchased a previously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor:
Unfortunately, the new stereo doesn’t completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:
In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.
Required:
- 1. CONCEPTUAL CONNECTION In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?
- 2. CONCEPTUAL CONNECTION Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?
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Chapter 8 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
- How do I do a general journal on this entry? Master Flow purchased a specialized pipe bending machine for the Warehouse. The machine has a purchase price of $8,000. It will cost $300 to have it delivered; $500 to have it setup and it requires a custom platform that will cost $1,000. The machine uses disposable grommets. Scott purchases an initial lot of $200 pieces of the disposable grommets for $200. The Manufacturer for the Machine is providing $10,000, 90 Day financing at a 10% interest rate for the purchase.arrow_forwardSunland's Auto Care is considering the purchase of a new tow truck. The garage doesn't currently have a tow truck, and the $60,050 price tag for a new truck would represent a major expenditure. Sunland Austen, owner of the garage, has compiled the following estimates in trying to determine whether the tow truck should be purchased. Initial cost Estimated useful life Net annual cash flows from towing Overhaul costs (end of year 4) Salvage value The company's cost of capital is 9%. Sunland's good friend, Rick Ryan, stopped by. He is trying to convince Sunland that the tow truck will have other benefits that Sunland hasn't even considered. First, he says, cars that need towing need to be fixed. Thus, when Sunland tows them to her facility, her repair revenues will increase. Second, he notes that the tow truck could have a plow mounted on it, thus saving Sunland the cost of plowing her parking lot. (Rick will give her a used plow blade for free if Sunland will plow Rick's driveway.) Third,…arrow_forwardJohn's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars: Trail Blazer Grand Cherokee Acquisition cost $25,000 $6,000 Repairs $ 6,000 — Annual operating costs (Gas, maintenance, insurance) $ 2,280 $2,100 What should John do? What are his savings in the first year?arrow_forward
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- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning