Philip is choosing between model A (a budget model) and model B (with more featu

ID: 1140157 • Letter: P

Question

Philip is choosing between model A (a budget model) and model B (with more features and a higher purchase price). What incremental costs would Philip incur if he chose model B instead of the less expensive Model A?

As your suggestion, which model is preferred? (Multi-choice question, wrong selection will cut off 2 points.)

Select one or more:

a. Because Model B has more features, a decision would also have to consider the incremental benefits offered by those features

b. The incremental annual maintenance cost of B is 1750/year.

c. Notice that the incremental costs of model B are both "+" and "-", Model A would be suggested since it has a lower total cost.

d. The incremental cost of B is $7500 on purchase price which means Model B costs more than Model A.

Cost Items Model A Model B Purchase price $10,000 $17,500 Installation costs 3,500 5,000 Annual Maintenance costs 2,500 750 Annual utility expenses 1,200 2,000 Disposal costs after useful life 700 500

Explanation / Answer

Option a and c

To find the incremental cost associated with selecting model B instead of model A we need to subtract the model A with model B.

Cost Items

Model A

Model B

Incremental Cost (Model B- Model A)

Purchase price

10,000

17,500

7500

Installation costs

3,500

5,000

1500

Annual Maintenance costs

2,500

750

-1750 per year

Annual utility expenses

1,200

2,000

800 per year

Disposal costs after useful life

700

500

-200

From the above table we can see that incremental cost is positive for some categories and negative for some categories. As the purchase price of Model B is more than Model A, it would have additional features which need to be considered before selecting model B.