Marginal costs Jimmy Johnson is interested in buying a new Jeep SUV.
There are two options available, a V6 model and a V8 model. Whichever
model he chooses, he plans to drive it for a period of 5 years and then
sell it. Assume that the tradein value of the two vehicles at the end
of the 5year ownership period will be identical.
There are definite differences between the two models, and Jimmy
needs to make a financial comparison. The manufacturer’s suggested
retail price (MSRP) of the V6 and V8 are $30,260 and $44,320,
respectively. Jimmy believes the difference of $14,060 to be the
marginal cost difference between the two vehicles. However, there is
much more data available, and you suggest to Jimmy that his analysis may
be too simple and will lead him to a poor financial decision. Assume
that the prevailing discount rate for both vehicles is 5.5% annually.
Other pertinent information on this purchase is shown in the following
table:
V6

V8

MSRP

$30,260

$44,320

Engine (liters)

3.7

5.7

Cylinders

6

8

Depreciation over 5 years

$17,337

$25,531

Finance charges* over entire 5year period

$5,171

$7,573

Insurance over 5 years

$7,546

$8,081

Taxes and fees over 5 years

$2,179

$2,937

Maintenance/repairs over 5 years

$5,600

$5,600

Average miles per gallon

19

14

Ownership period in years

5

5

Miles driven per year over 5 years

15,000

15,000

Cost per gallon of gas over 5year ownership

$3.15

$3.15

a. Calculate the total “true” cost for each vehicle over the 5year ownership period.
b. Calculate the total fuel cost for each vehicle over the 5year ownership period.
c. What is the marginal fuel cost from purchasing the larger V8 SUV?
d. What is the marginal cost of purchasing the larger and more expensive V8 SUV?
e. What is the total marginal cost associated with purchasing the V8
SUV? How does this figure compare with the $14,060 that Jimmy
calculated?