On January 2, 2019, Twilight Hospital purchased a $95,200 special radiology scanner from Bella Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $104,000.

Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2019 from Bella Inc. was a mistake. He points out that Dyno has a scanner that will save Twilight Hospital $25,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $111,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Jacob agrees to buy the old scanner from Twilight Hospital for $44,000.

a. If Twilight Hospital sells its old scanner on January 2, 2017, compute the gain or loss on the sale.
b. Prepare an incremental analysis of Twilight Hospital.

The company must buy the new scanner which will save costs of $245,000.

Explanation:

Opportunity cost or loss is the contribution lost due to the leaving one opportunity to exploit the other one. So in this case, the opportunity the company is going to exploit is purchasing the new scanner that costs $111,000. So according to relevant costing the relevant cost is:

(a) Cash flow in nature.

(b) Future contract binding (future related)

(c) Incremental cost or differential cost

To find whether the cost is incremental cost or not we can find through the following method.

Step 1: Find the cash flow that is arising due to the decision?

Step 2: Find the cash flow arising if we don't take the decision?

Step 3: The difference of step 1 and 2 is differential or incremental cost.

All the inflows and outflows are cash flow in nature and future related. The only thing we have to find is that whether or not the cost is incremental or not.

For this Term:

                                                   Step 1              Step 2             Step 3

                                            Take Decision    If we Don't     Incremental

Operating cost savings           312,000                -                  312,000

New scanner cost                    (111,000)                -                 (111,000)

Old Scanner disposal               44,000                 -                  44,000  

TOTAL SAVINGS                                                                       $245,000

Kindly also review the following question for your better understanding