Neela, a recent Babson graduate, wants to lease a car. She is evaluating two new car leases: the “Solis”, an all-electric hatchback, and the “Escapade”, a hybrid SUV. Neela estimates she will drive about 10,000 miles per year.

The Solis lease is $450 per month and requires frequent charging. Neela estimates the cost per mile for electric charging will be $0.05. There is virtually no engine maintenance required on the Solis, so she won't incur any annual maintenance cost if she leases it.

The Escapade lease is $400 per month and runs on gas and electricity, which it creates as it is driven. It is expected to get 50 miles per gallon. The Escapade does require annual engine maintenance. Neela estimates her cost per mile for both gas and engine maintenance will be $0.105.

Based on this information, what is the number of annual miles (the point of indifference) where the annual lease and fuel costs of operating each car would be the same?

Question

Neela, a recent Babson graduate, wants to lease a car. She is evaluating two new car leases: the “Solis”, an all-electric hatchback, and the “Escapade”, a hybrid SUV. Neela estimates she will drive about 10,000 miles per year.

The Solis lease is $450 per month and requires frequent charging. Neela estimates the cost per mile for electric charging will be $0.05. There is virtually no engine maintenance required on the Solis, so she won't incur any annual maintenance cost if she leases it.

The Escapade lease is $400 per month and runs on gas and electricity, which it creates as it is driven. It is expected to get 50 miles per gallon. The Escapade does require annual engine maintenance. Neela estimates her cost per mile for both gas and engine maintenance will be $0.105.

Based on this information, what is the number of annual miles (the point of indifference) where the annual lease and fuel costs of operating each car would be the same?

BlackTom AI · Accepted Answer

The task asks for the annual mileage at which the total annual costs of leasing and operating each car are the same, i.e., the indifference point.
First, compute each car's annual fixed lease cost and variable cost per mile.
- Solis (all-electric): monthly lease = 450 dollars, so annual lease cost = 450 * 12 = 5400 dollars. Variable cost per mile for charging is 0.05 dollars, so annual variable cost = 0.05 * miles.
- Escapade (hybrid): monthly lease = 400 dollars, so annual lease cost = 400 * 12 = 4800 dollars. Variable cost per mile includes gas and maintenance at 0.105 dollars per mile, so annual variable cost = 0.105 * miles.
Set total annual costs equal to find the indifference miles m:
5400 + 0.05*m = 4800 + 0.105*m
Subtract 0.05*m from both sides to gather like terms:
5400 = 4800 + 0.055*m
Subtract 4800 from both sides:
600 = 0.055*m
Solve for m by dividing both sides by 0.055:
m = 600 / 0.055 ≈ 10909.0909...
Thus, the miles at which annual costs are equal are approximately 10,909.09 miles per year.

Note on structure: The fixed lease costs (5400 vs 4800) drive the difference in base annual cost, while the per-mile costs (0.05 vs 0.105) determine how quickly each option accumulates additional costs with miles driven. The indifference point occurs where the higher fixed cost is offset by its lower per-mile expense. In this case, Solis has a higher fixed cost but lower per-mile expense, and Escapade has a lower fixed cost but higher per-mile expense; the crossing occurs at about 10.9k miles per year.

If you intended multiple answer choices, none were provided in the options field, so this analysis focuses on deriving the numeric indifference point from the given cost structure.

2025Summer-ACC2002-02 Quiz 2 - Cost / Volume / Profit (CVP)

View Explanation

Log in for full answers

Similar Questions

Continued from the previous question.Another option offered is no fixed cost and $45 an hour. What is the maximum number of hours that it would be better to use this second option?Give your answer as a whole number, only writing the value.

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

Which of the following statement regarding cost is correct:

Under the assumptions used in cost-volume-profit analysis, as the activity increases:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler