FYI Sanitation is currently eight months into a year-long lease contract on a garbage truck at a cost that averages $500 per month. Other variable costs (fuel, workers, etc.) for operating the truck amount to $300 per month. If the monthly revenue from operating the truck is $400, and these conditions are expected to continue into the future, to maximize its profit, FYI Sanitation should
A) stop operating the truck immediately and not renew the lease for next year.
B) continue operating the truck indefinitely.
C) continue operating the truck until the lease expires, then not renew the lease for next year.
D) stop operating the truck now but renew the lease and begin operating the truck again next year.

Question

Quizplus · Accepted Answer

FYI Sanitation should continue operating the truck until the lease expires, then not renew the lease for next year. This is because the total cost of the truck is $800 per month ($500 for the lease and $300 for other variable costs), which is greater than the monthly revenue of $400. However, since they have already committed to the lease for eight months, it would be most cost-effective to continue operating the truck for the remaining four months to avoid losing the $4,000 they have already spent on the lease. After the lease expires, it would be best not to renew it, as the revenue from operating the truck does not cover the total cost.

FYI Sanitation Is Currently Eight Months into a Year-Long Lease