Question

Breakeven analysis Paul Scott has a 2008 Cadillac that he wants to update with a GPS system so he will have access to up-to-date road maps and directions. Aftermarket equipment can be fitted for a flat fee of $490, and the service provider requires monthly charges of $21. In his line of work as a traveling salesperson, he estimates that this device can save him time 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?

Answer 1

Breakeven point means the point at which there is no loss or no profit. It is the point at which cost is equal to revenue.

a. Savings that Paul will make every month =$36-$21 =$15

Intial cost of the equipment that Paul will have to recover will take him =490/15 =32.67 months = 33 months.

b. Based on (a), Paul should have the GPS system installed in the car because he plans to have the car for a period of 3 years which is equal to 36 months implying that he will save $15 for the last 3 months and $5 for the 4th last month. He should install the GPS because it will lead him to save money.