Question

Kristen Lu purchased a used automobile for $16,750 at the beginning of last year and incurred the following operating costs:

  

Depreciation ($16,750 ÷ 5 years)	$3,350
Insurance	$1,700
Garage rent	$900
Automobile tax and license	$450
Variable operating cost	$0.13 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 $3,350. The car is kept in a garage for a monthly fee.

  

Required:

1.

Kristen drove the car 16,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)

Fixed cost per mile
Variable operating cost per mile
Average cost per mile	$0.00

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? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Variable operating costs
	Depreciation
	Automobile tax
	License costs
	Insurance costs

Answer 1

1). Total Fixed cost = $3350 + 1700 + 900 + 450 = $6400
Fixed cost per mile = $6400 / 16000 miles = $0.4 per mile
Varianble cost per mile = $0.13 per mile
Average cost per mile = $0.53 per mile

2). While taking a decision related to use own car or rented car for a cross country trip, relevant cost includes only variable cost and not fixed cost because fixed cost is going to occur anyway whether or not use own car while variable cost is the cost which will incur only when own car is used. Hence only variable cost is relevant cost and fixed cost is irrelevant.