Question

Problem 15 Marita Lo desires to purchase a new front office computer system for her Lo Motel (LOMO) After considerable discussion with purveyors, she has narrowed her choices to systems sold by ABC Company and XYZ Computers. The system proposed by each company is expected to have a useful life of seven years. She believes the alternative systems are equivalent for providing services required by the LOMO; therefore, her focus is cost. The associated costs of each system are as follows:

Answer 1

Answer with working and explanation is given below

1 Irrelevant Costs Irrelevant costs are the costs which are not considered for decision making In the given case Differential cost for Labor and Supplies for 2 alternatives are zero Hence Labor and Supplies cost are irrelevant for decision making 2 Differential Cost Analysis ABC Co. XYZ Computers $30,000 Differential Cost Comments $5,000 Incremental cost $25,000 Initial cost Annual cost Utilities Maintenance Salvage value Net cost | $1,000 $3,000 $5,000 $24,000 $800 $2,500 -$8,000 $25,300 $200 Savings $500 Savings $3,000 Savings $1,300 Net On cost Conclusion: Martia should prefer ABC Co system since the net cost is lower for it based on relevant cost analysis