Home / Questions / 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.
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