Breakeven Analysis: Paul Scott has a 2008 Cadillac that he wants to update with
ID: 2756702 • Letter: B
Question
Breakeven Analysis: Paul Scott has a 2008 Cadillac that he wants to update with a GPS system so that he will have access to up-to-date road maps and directions. Aftermarket equipment can be fitted for a flat fee of $500, and the service provider requires monthly charges of $20. In his line of work as a traveling salesperson, he estimates that this device can save him time and money, about $35 per month (as the price of gas keeps increasing). He plans to keep the car for another 3 years
A. Calculate the breakeven point for the device in months.
B. Based on a, should Paul have the GPS system installed in his car?
Explanation / Answer
Answer to part A:
Cost incurred = $500
Monthly Charges = $20
Savings per month = $35
Net Savings = $35 - $20 = $15
Breakeven point for the device in months
= Point where there is no profit or loss
= Number of months required to get the investment back
= Investment / Net Savings per month
= $500 / $15
= 33.33 months
Answer to Part B:
As the investor wants to keep the GPS system for 3 years,
Profit = (36 months - 33.33 months) * net savings
= 2.67 * $15
= $ 40
As the investor is able to earn profits from GPS system, he should install it in his car.
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