Boss Company currently leases a delivery van from Check 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 van, which can be leased from David, SA., 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) a lease from David, SA., is economically preferable to a lease from Check Enterprises regardless of the monthly use.
B) a lease from Check Enterprises is economically preferable below 1,000 miles per month.
C) a lease from Check Enterprises is economically preferable to a lease from David, SA., regardless of the monthly use.
D) a lease from Check Enterprises is economically preferable above 1,000 miles per month.

Question

Quizplus · Accepted Answer

To determine the preferable lease option, we can set up an equation to compare the costs from both companies. For Check Enterprises, the cost is £250 + £0.40 per mile. For David, SA., the cost is £600 + £0.05 per mile. Setting these two equations equal to each other allows us to solve for the breakeven point: £250 + £0.40m = £600 + £0.05m, where m represents miles. Solving for m gives us the breakeven point. Below this point, Check Enterprises is cheaper, making option B correct.

Boss Company Currently Leases a Delivery Van from Check Enterprises