Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $250 per month plus $0.40 per mile. Management is evaluating the desirability of switching to a modern, fuel-efficient truck, which can be leased from Goliath, Inc., for a fee of $600 per month plus $0.05 per mile. All operating costs and fuel are included in the rental fees. In general, a lease from
A)Goliath, Inc., is economically preferable to a lease from Burton Enterprises regardless of the monthly use.
B)Burton Enterprises is economically preferable below 1,000 miles per month.
C)Burton Enterprises is economically preferable to a lease from Goliath, Inc., regardless of the monthly use.
D)Burton Enterprises is economically preferable above 1,000 miles per month.

Question

Quizplus · Accepted Answer

To determine the economically preferable option, we calculate the cost for each option and compare them. The cost for Burton Enterprises is $250 + $0.40 per mile, and for Goliath, Inc., it is $600 + $0.05 per mile. Setting these two costs equal to each other allows us to solve for the breakeven point in miles: $250 + $0.40m = $600 + $0.05m, where m is the number of miles. Solving for m gives us the breakeven point. Below this point, Burton Enterprises is cheaper, making it the preferable option below a certain mileage threshold.

Marlowe Company Currently Leases a Delivery Truck from Burton Enterprises