Relevant and sunk costs Don Baxter's 6-year-old Chevrolet Impala requires repairs estimated at $5,400 to make it roadworthy again. His friend Aaron Bloom suggested that he buy a 6-year- old Ford Escort instead for $5,400 cash. Aaron estimated the following costs for the two cars: COSTS IMPALA ESCORT Acquisition cost. Repairs..... Annual operating costs: gas, maintenance, insurance.. $24,000 5,400 $5,400 2,900 1,800 Required (a) What costs are and are not relevant to this decision? Why? (b) What should Don do? Explain. (c) What quantitative and qualitative factors are relevant to his decision? Why?
Relevant and sunk costs Don Baxter's 6-year-old Chevrolet Impala requires repairs estimated at $5,400 to make it roadworthy again. His friend Aaron Bloom suggested that he buy a 6-year- old Ford Escort instead for $5,400 cash. Aaron estimated the following costs for the two cars: COSTS IMPALA ESCORT Acquisition cost. Repairs..... Annual operating costs: gas, maintenance, insurance.. $24,000 5,400 $5,400 2,900 1,800 Required (a) What costs are and are not relevant to this decision? Why? (b) What should Don do? Explain. (c) What quantitative and qualitative factors are relevant to his decision? Why?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Relevant and sunk costs Don Baxter's 6-year-old Chevrolet Impala requires repairs estimated
at $5,400 to make it roadworthy again. His friend Aaron Bloom suggested that he buy a 6-year-
old Ford Escort instead for $5,400 cash. Aaron estimated the following costs for the two cars:
COSTS
IMPALA
ESCORT
Acquisition cost.
Repairs..
Annual operating costs: gas, maintenance, insurance.
$24,000
$5,400
5,400
2,900
1,800
Required
(a) What costs are and are not relevant to this decision? Why?
(b) What should Don do? Explain.
(c) What quantitative and qualitative factors are relevant to his decision? Why?
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