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
EBK MANAGERIAL ACCOUNTING: THE CORNERST
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