Farlen & Halikman is a CPA firm specializing in payroll preparation. The firm has been successful in automating much of its work, using high-speed printers for check processing and report preparation.

The computerized approach, however, has problems. Over the past 20 months, the printers have broken down at the rate indicated in the following table:

Each time the printers break down, Farlen & Halikman estimates that it loses an average of $300 in production time and service expenses. One alternative is to purchase a service contract for preventive maintenance. Even if Farlen & Halikman contracts for preventive maintenance, there will still be breakdowns, averaging one breakdown per month. The price for this service is $150 per month.
APPROACH c To determine if the CPA firm should follow a “run until breakdown” policy or contract for preventive maintenance, we follow a 4-step process:
Step 1 Compute the expected number of breakdowns (based on past history) if the firm continues as is, without the service contract.
Step 2 Compute the expected breakdown cost per month with no preventive maintenance contract.
Step 3 Compute the cost of preventive maintenance.
Step 4 Compare the two options and select the one that will cost less.

Transcribed Image Text:

NUMBER OF BREAKDOWNS 0 1 2 3 NUMBER OF MONTHS THAT BREAKDOWNS OCCURRED 2 864 Total: 20