Two Financing Options Are Being Offered in Purchasing a Vehicle

question 5

Essay

Two financing options are being offered in purchasing a vehicle:
• Option 1: cash purchase at $20,500.
• Option 2: Debt purchase - Purchase the vehicle at the price of $22,600 and finance it over three years with
equal monthly payments at 3.5% APR.
Which option is more economical at an interest rate of 6% compounded monthly?

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Definitions:

Labor Efficiency Variance

The difference between the actual hours worked and the standard hours expected, multiplied by the standard labor rate, highlighting efficiency in labor.

Standard Direct Labor

The predetermined cost of labor that is directly involved in the production of goods.

Standard Rate

A predetermined cost or price that is used for calculating variances, budgeting, or setting product prices.

Variable Overhead

The portion of overhead costs that varies directly with production volume.