What would be the estimated total cost of ownership of this freezer if the restaurant owner buys the extended warranty package?

A restaurant needs to buy a new freezer. The owner applies total cost of ownership model to calculate the life-time cost of the freezer. This equipment has a price tag of $1,000, the supplier can offer free delivery if the restaurant pays off immediately. Estimated electricity consumption of the freezer is $200 in 5 years. The supplier ascertains that the freezer is very durable, buyer doesn’t need to care about maintenance costs. However, if the restaurant needs better protection from breakdowns, the warranty is free for the first 12 months after the purchase. This warranty package can be extended once for another 24-month period with the cost of $75. After 5 years, the buyer will be able to resell this freezer for $250.

What would be the estimated total cost of ownership of this freezer if the restaurant owner buys the extended warranty package?
A . $1,025
B . $1,200
C . $1,275
D . $1,525

View Answer

Answer: A

Explanation:

The total cost of ownership would be the sum of all estimated costs.

The costs are as the following:

– Purchase price: $1,000

– Electricity consumption: $200

– Extended warranty: $75

Total expense = $1,000 + $200 +$75 = $1,275. Then subtract the resale price from this sum, the total cost of ownership is $1,025.

Reference: CIPS study guide page 136-169

LO 3, AC 3.1