The Crispy Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs.
What is the differential delivery cost per month for expanding into the home delivery market?

b) $17,500

Explanation:

First, the multiple options to the question are as follows

a) $12,500 b) $17,500 c) $19,750 d)$20,425

Solution

The question is to determine which of the costs to be incurred in a door-to-door delivery service is a differential cost per month

The following costs have been given:

1) an additional $12,500 in labor costs per month

2) an additional gas, oil and maintenance to the tune of $5,000

3) Home delivery use of trucks allocated 45% of existing $6,500 fixed vehicle costs.

It should however be noted that, the costs we call differential are only the ones that are particularly attributed to the home delivery market service and as such they will only include variable costs not fixed costs

Therefore, the differential costs = $12,500 for labor + $5,000 for maintenance

= $17,500

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