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A taxi company can operate a taxi for a maximum of 1,600 hours per year. It generates revenue of $50 per hour and has variable running costs of $30 per hour. The fixed costs are charged at $10 per hour.
The company is evaluating two options for the taxi maintenance.
Option 1:
Remedial maintenance:
This is caused by an average four breakdowns and will mean the taxi is unavailable for 18 hours per year. Remedial maintenance costs are $55 per hour
Option 2:
Preventive maintenance:
This will entail the taxi undergoing three intensive services over the year, each of which will take five hours. Preventive maintenance costs are $75 per hour.
Task 1: (3 marks)
The company wishes to choose the most economic method of maintaining a taxi. Calculate the net annual relevant cost per taxi of the two options which will allow them to make the decision.
Option 1: Remedial maintenance $……………..
Option 2: Preventive maintenance $……………Can you please make me understand the answer for the task 1?
Will the loss of cashflow due to unavailability of the taxi be the relevant or not?The lost contribution of $20 per hour is relevant for both options. In option 1 it will be lost for the 18 hours a year while the taxi is unable. For option 2 it will only be lost for 15 hours because of the time while it is being serviced.
I assume that you have found the question in your Revision Kit. Does the kit not show the workings for the answer? 🙂
The question is not from the revision kit and I actually don’t have the right answer for this
Well we do not provide answers!
This forum is to help with problems that students might have, not to provide full answers to full questions.
We do remedial maintenance after the taxi is being damaged or accident then it automatically becomes unavailable to run,so how would the lost contribution be relevant?
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