Relevant Costs
Response to the following problem:
Gilliland Company provides maid services for local hotels. Last year the firm acquired a cleaning machine for $50,000. The firm expected to use the machine for five years. However, this year a new, more efficient machine has been introduced on the market. The accountant for Gilliland has determined that the annual total operating costs for the old machine are $120,000. The annual operating costs for the new machine would be $100,000, and the purchase price is $65,000. The president of Gilliland feels the company should not buy the new machine. He points out that the operating costs of $100,000 and the purchase price of $65,000 for the new machine, plus the original cost of the old machine of $50,000, are greater than the operating costs of the old machine
1. Do you agree with the president?
2. What type of cost is the $50,000 purchase price of the old machine?