About twice a year a switch fails in a company's network center. Under the maintenance contract, the switch would be replaced in two hours losing the business $1,000 per hour. The cost of a spare…

Question

Options

• AIt is more cost-effective to eliminate the maintenance contract and purchase a replacement upon failure.
• BIt is more cost-effective to purchase a spare switch prior to an outage and eliminate the maintenance contract.
• CIt is more cost-effective to keep the maintenance contract instead of purchasing a spare switch prior to
• DIt is more cost-effective to purchase a spare switch prior to an outage and keep the maintenance contract.

• A
  10% (4)
• B
  24% (10)
• C
  7% (3)
• D
  60% (25)

Explanation

Perform a cost comparison across all options. Contract only (no spare): $1,500/year + (2 failures × 2 hours × $1,000) = $1,500 + $4,000 = $5,500/year. Spare only (no contract): When a failure occurs, use the on-hand spare (no downtime), then purchase a replacement spare ($3,000 each time); 2 failures/year = $6,000/year in spare replacements - more expensive than the contract. Spare + contract (Option D): $3,000 initial spare + $1,500 contract/year. When a switch fails, the on-hand spare is deployed immediately (zero downtime cost), and the failed unit is replaced under the maintenance contract - restoring the spare. Ongoing cost after initial purchase: $1,500/year. Total first-year cost: $4,500, with subsequent years at $1,500. This is the lowest long-term cost and eliminates downtime, making Option D the most cost-effective choice.

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