Auto Lube provides oil change services for all makes and models of passenger automobiles. The company would like to expand its services and must decide between two alternatives—tune-ups or smog certifications (required in the state of California where Auto Lube resides). Additional shop space would be required at a cost of $20,000 per year for each alternative. The revenues and costs that follow are anticipated for each alternative.

Required

a. What is the opportunity cost of selecting tune-ups over smog certifications’? Giteneaere

b. What is the opportunity cost of selecting smog certifications over tune-ups?

b. Opportunity cost: $58,000

c. Using the format in Table 1.4, perform differential analysis to determine which alternative is more profitable, and by how much.

d. Explain how planning and control could be used to evaluate the profitability of the alternative selected in part c.

Transcribed Image Text:

Smog Certifications Tune-Ups Revenue Expenses: $155,000 $225,000 Equipment depreciation 15,000 12,000 Parts 0 65,000 Personnel 80,000 90,000