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White Water Tours is considering the purchase of a new tour boat. They are faced with cho

 White Water Tours is considering the purchase of a new tour boat. They are faced with choosing between the Wave Runner and the Split Hull models. The boats are comparable on performance and both meet the company's needs equally. Both boats have an expected useful life of five years at which time they will be sold. The following information has been gathered to assist in making the purchase decision:

 

WAVE RUNNER

SPLIT HULL

Purchase price

$110,350

$121,900

Fuel cost over useful life

29,680

28,430

Insurance cost over useful life

60,000

60,000

Estimated repairs and maintenance

15,490

17,380

Revenue generated over useful life

575,000

575,000

Estimate selling price at end of useful life

22,750

18,500

 

Required:

A. Which if any of the listed costs above are not relevant to your decision?

B. What are the total relevant costs of purchasing the Wave Runner?

C. What are the total relevant costs of purchasing the Split Hulla?

D. What is the differential cost involved in your decision?

1) Fixed costs stay constant in total over a wide range of activity levels.

2) All costs contain both a fixed and a variable part.

3) The total cost of a product equals the total fixed costs plus the average variable costs.

4) A marginal cost is the cost of making one more unit of a product.

5) Average variable costs:

A) remain the same as production decreases.

B) remain the same as production increases.

C) go down as production decreases.

D) remain the same no matter if production increases or decreases.

Dec 07 2019 View more View Less

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