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    Question

    A company purchased a specialised machine for ₹10 lakh

    two years ago. Due to technological changes, the machine has no resale value today. The company is evaluating whether to replace it with a new automated machine that would reduce operating costs. While analysing the replacement decision, the accountant suggests considering the original purchase price of ₹10 lakh while computing the cost–benefit analysis.  Which of the following best describes the nature of the ₹10 lakh cost? 
    A It is a relevant cost since it affects the total investment Correct Answer Incorrect Answer
    B It is a sunk cost and should be ignored for decision-making Correct Answer Incorrect Answer
    C It is an opportunity cost of continuing operations Correct Answer Incorrect Answer
    D It is a variable cost associated with production Correct Answer Incorrect Answer
    E It is a future incremental cost Correct Answer Incorrect Answer

    Solution

    A sunk cost is a past cost that cannot be recovered. It is irrelevant for making future decisions because it will not change regardless of the chosen course of action.  In the given case:  ● The machine was purchased two years ago  ● ₹10 lakh has already been spent  ● The amount cannot be recovered or influenced by the replacement decision today 

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