Question

. Sally wants to purchase a new sofa because she purchased a new home at the beach. Sally visited two stores and she narrowed down her choices to a red sofa and a blue sofa. Sally owns pets so she considers the cost of insurance to insure each sofa. Sally compiled the following data and she realizes that the sales tax to purchase the sofa is 10% in her state.  

Red Sofa Blue Sofa

Price 8000 8400

Insurance 950 350



Which sofa should Sally purchase? What costs are relevant in her decision? Why?

Answer 1

Answer: Price Sales Tax (10%) Insurance Total Relevant Cost Red Sofa $8,000 $800 $950 Blue Sofa $8,400 $840 $350 Differential Cost ($400) ($40) $600 $9,750 $9,590 $160 Which sofa should Sally purchase? Why? Answer: Sally should purchase the blue sofa. The costs that are relevant in her decision include the price of the sofa, the taxes, and the cost of the insurance to insure the sofa. Although the cost and taxes associated with the blue sofa are higher, the cost to purchase insurance on the blue sofa is more cost effective compared to the red sofa.