Question

Exercise 12-14 Identification of Relevant Costs [LO12-1]

Kristen Lu purchased a used automobile for $22,900 at the beginning of last year and incurred the following operating costs:

Depreciation ($22,900 ÷ 5 years)	$	4,580
Insurance	$	2,400
Garage rent	$	1,200
Automobile tax and license	$	620
Variable operating cost	$	0.07	per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line depreciation is $4,580. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 22,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)

Average fixed cost per mile
Variable operating cost per mile
Average cost per mile

2.

Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? Assume that there is no decrease in the resale value of the car due to its use. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

• Variable operating costs
• Depreciation
• Automobile tax
• License costs
• Insurance costs

Answer 1

1) Total fixed costs

Depreciation	$4,580
Insurance	$2,400
garage Rent	$1,200
Automobilestax and insurance	$620
Total fixed costs	$8,800 [$4,580+$2,400+$1,200+$620]

Fixed costs per mile = Total fixed costs/miles

$8,800/22,000

Average fixed cost per mile = $0.4 per mile

Variable cost = $0.07 per mile

Total cost per mile = $0.4+$0.07

=$0.47 per mile

2) Fixed costs are constant. They do not change whether she uses car or rent car.Only variable costs changes if the car is rented.

There will be no variable costs. so relevant cost is:

*variable operating costs