Question

Anika plans to purchase a Janome embroidery machine. The retail price for the Janome 12 model is $10,000 plus $500 for lifetime maintenance and $1,500 per year (for five years) in operating expenses. The Janome 15 model retails for $12,000 and has the same lifetime maintenance fee. However, the Janome 15 model increases productivity by $500 annually and reduces operating expenses by $500 per year for five years. Assuming a five-year horizon, what is the economic savings (customer inducement) for purchasing the Janome 15 model?

Answer 1

Answer:

The economic savings for purchasing the Janome 15 model = $3000

Explanation:

Step 1: Calculate Total cost of purchasing Janome 12 model

Retail cost = 10000

Lifetime maintenance = 500

Operating expenses = 1500 × 5 = 7500

               Total cost = 18000

Step 2: Calculate total cost and benefit of Janome 15

Retail cost = 12000

Lifetime maintenance = 500

Operating expenses = 1500 × 5 = 7500

                total cost = 20,000

Calculate benefits of Janome 15

increase in  productivity = 500 × 5 = 2500

reduction in operating expenses = 500 × 5 = 2500

                                total benefit = 5000

Step 3: Calculate net cost of Janome 15

       net cost = total cost - total benefit

                      = 20,000 - 5000

                      = 15000

Step 4: Calculate net benefit of buying Janome 15

            18000 - 15000 = 3000