This is perhaps a stupid question. But here is is anyway: Four years ago a company purchased a $500,000 machine with an estimated useful life of 10 years. For accounting purposes, the machine is being depreciated in the amount of $50,000 annually. The machine is used to manufacture a particular product that has not alternative use or scrap value. The annual revenue generated from operating the machine is $650,000 and the annual cost of the factors of production, other than depreciation, employed to generate that revenue is $600,000. Should the company continue to operate the machine? A. Yes B. No, because operating costs are equal to operating revenues C. No, because the purchase price of the machine is a sunk cost D. No, because the opportunity cost of operating the machine is zero. The correct answer is A, because: The opportunity cost of operating the machine is zero. Because the machine is a sunk cost and generates net revenue of $50,000, the company should continue to operate the machine. My question is why is the $50,000 in depreciation not added into the annual costs, making costs = revenue?
I think it is stated that " the annual cost of the factors of production, other than depreciation" is 600,000. so total cost = costs other than depreciation + depreciation expense = 600,000 + 50,000 = 650,000. Is thats what you are referring or I am missing something?
I said A too The way I see it is that cost =revenue from the accounting point of view but the machine has been already bought, has no alternative value so at least it is paying for itself if you keep on producing that product
I guess the decision is: Continue to produce: Revenue = 650,000 Operating Costs = -600,000 Depreciation = -50,000 Net Profit = 0 You will get this for 6 more years. Stop producing Revenue = 0 Operating Costs = 0 Depreciation = 50,000 Net Profit = -50,000
Depr is implicit cost so Economic profit equals = 0. So if Ecomonic profit equals 0 thats mean that the firm earn normal profit to cover its operation risks so the firm must continue operations
yes, i think net revenue means the account profit, not economic profit.