Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 10.8%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? (Note: dollar amounts are in thousands.) Model Year 0 Year 1 Year 2 Year 3 - $4.2 - $2.1 Year 4 Year 5 Year 6 Year 7 Old Reliable - $200 - $4.2 - $2.1 - $4.2 -$2.1 - $4.2 - $4.2 - $2.1 - $4.2 - $4.2 Short and Sweet - $101 Based on the costs of each model, which should it choose? (Select the best choice below.) O A. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. O B. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. O C. Gateway Tours should choose Old Reliable because it lasts longer. O D. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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