A pump has failed in a facility that will be completely repl

A pump has failed in a facility that will be completely replaced in 3 years. A brass pump costing $6000 installed will last 3 years. However, a used stainless steel pump that should last 3 more years has been sitting in the maintenance shop for a year. The pump cost $13,000 new. The accountants say the pump is worth $7000 now. The maintenance supervisor says that it will cost an extra $500 to reconfigure the pump for the new use and that he could sell it used (as is) for $4000. What is the book cost of the stainless steel pump? What is the opportunity cost of the stainless steel pump? How much cheaper or more expensive would it be to use the stainless steel pump rather than a new brass pump?

Solution

(a) Book cost of stainess steel pump = Accounting cost = $7,000

(b) Opportunity cost of stainless steel pump is the cost that has to be paid if stainless steel pump is not used, instead the brass pump is used.

Opportunity cost = Cost of brass pump - Salvage value from selling stainless steel pump as it is

= $6,000 - $4,000 = $2,000

(c)

If brass pump is used, Total cost = $6,000 - $4,000 = $2,000

If stainless steel pump is used, Total cost = Cost of reconfiguration = $5,000

So, It is more expensive to use the stainless steel pump.