Answered Essay: Management of Plascencia Corporation is considering whether to purchase a new model 370

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Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $360, 000 or a new model 220 machine costing $340, 000 to replace a machine that was purchased 7 years ago for $348, 000. The old machine was used to make product I43L until it broken down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L. Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $340, 000 in the new machine, the money could be invested in a project that would return a total of $411, 000. In making the decision to buy the model 220 machine rather than the modal 370 machine, the differential cost was: $20, 000 $8, 000 $12, 000 $63, 000

Expert Answer

 

Total cost of buying 220 machine=$340,000

Total cost of buying 370 machine=$360,000

Hence differential cost of buying the model 220 machine=($360,000-$340,000)

which is equal to

=$20,000(A).

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