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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 $……………Doubt:
Will the loss of cashflow be relevant for remedial and prevention maintenance due to unavailability of taxi?
There shouldn’t be any loss of cashflow for preventive maintenance as we will be scheduling it in our unproductive time so there won’t be any loss of cashflow, right??
I agree with you, that there is no lost contribution in the case of preventive maintenance.
Does the answer in your book agree also? 🙂
The solution I have doesn’t agree to this.
There is a loss of cashflow for remedial maintenance. Is it right to include loss of cashflow for remedial maintenance?
It is correct to include lost contribution for remedial maintenance, but they should not include it for preventative maintenance.
If your book shows differently then it is not correct.
I think the lost contribution should not be included for remedial maintenance either, as taxi can operate maximum of 1600 hours per year. When the taxi is unavailable for remedial maintenance for 18 hours, the 18 hours could be compensated by running extra 18 hours in the mean time?
Correct me if my assumption is wrong here.I do understand your point (and I do not think this is a very good question at all).
However you should assume that the maximum of 1600 hours is for other reasons and that therefore if a taxi breaks down and needs remedial maintenance then it is out of action (losing contribution) and that the time cannot be picked up later.
So for the answer to be right, the loss of contribution should be included in remedial maintenance but not for preventive maintenance, right ??
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