Smith, Inc., is going to install a new accounting software to help deal with the large amount of work during tax season. They have a choice between three different software options that process accounting reports in a slightly different manner. Software A is relatively cheap to install, but uses a lot of computing resources to generate a report. Software B is more expensive to install than software A, but uses less computing resources for each report generated. Finally, software C is more expensive than both software A and software B, but uses the smallest amount of computing resources to generate a final report. The costs are as follows:
Software A FC: $200,000 VC: $60 per report
Software B FC:$300,000 VC: $25 per report
Software C FC: $400,000 VC: $10 per report
Which software is the best if Smith thinks he will need to create 5,000 reports using the new system?
Solution:
Total cost of each software is calculated as,
Total cost = Fixed cost + (Variable cost x Number of reports)
For 5,000 reports, total cost is calculated as below:
Software A:
Total cost = $200,000 + ($60 x 5,000)
Total cost = $500,000
Software B:
Total cost = $300,000 + ($25 x 5,000)
Total cost = $425,000 (lowest)
Software C:
Total cost = $400,000 + ($10 x 5,000)
Total cost = $450,000
Conclusion: Based on the total cost of each software, Software B is the best for creating 5,000 reports using the new system as it has the lowest total cost.
Smith, Inc., is going to install a new accounting software to help deal with the large...
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