Question 1
Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.
◦ true
◦ false
Question 2
Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:
| Original cost | $60,000 | $50,000 |
| Accumulated depreciation | $ 5,000 | - |
| Current salvage value | $40,000 | - |
| Remaining life | 5 years | 5 years |
| Annual operating expenses | $10,000 | $ 7,500 |
| Disposal value in 5 years | $ 0 | $ 0 |
Required:
a. What costs are sunk?
b. What costs are relevant?
c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?
d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?
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