Question

The engineering team at Manuel's Manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially, while Vendor B offers the same system at an initial cost of $420,000. Vendor A estimates an annual maintenance cost of $15,000 for the system, while Vendor B estimates an annual maintenance cost of

$10,000. If the company plans to use the system for 5 years, which vendor would be more cost-effective in the long run, considering the maintenance costs?

A) Vendor A

B) Vendor B

C) Both vendors are equally cost-effective over 5 years.

D) Insufficient data to determine cost-effectiveness.

Answer 1

Vendor A is more cost-effective for Manuel's Manufacturing, Inc., with a total 5-year cost of $455,000, as opposed to Vendor B's total cost of $470,000.

Step-by-step explanation:

To determine which vendor is more cost-effective for Manuel's Manufacturing, Inc., on the purchase of an enterprise resource planning (ERP) system, we need to calculate the total cost of ownership for the system from each vendor over the planned 5-year usage period.

For Vendor A, the initial cost is $380,000 plus 5 years of maintenance at $15,000 per year:

• Initial cost: $380,000
• Total maintenance cost over 5 years: 5 x $15,000 = $75,000
• Total cost for Vendor A over 5 years: $380,000 + $75,000 = $455,000

For Vendor B, the initial cost is $420,000 plus 5 years of maintenance at $10,000 per year:

• Initial cost: $420,000
• Total maintenance cost over 5 years: 5 x $10,000 = $50,000
• Total cost for Vendor B over 5 years: $420,000 + $50,000 = $470,000

Comparing these totals, Vendor A would be more cost-effective in the long run with a total cost of $455,000 versus Vendor B's total cost of $470,000.

Therefore, the answer is:

A) Vendor A