Question

Exercise 10-14 Identification of Relevant Costs [LO10-1] Kristen Lu purchased a used automobile for $25,100 at the beginning of last year and incurred the following operating costs: Depreciation ($25,100 ÷ 5 years) $5,020 Insurance $2,600 Garage rent $1,300 Automobile tax and license $680 Variable operating cost $0.12 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 $5,020. The car is kept in a garage for a monthly fee. Required: 1. Kristen drove the car 24,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.) 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

Solution 1:

Total cost for last year = Depreciation + Insurance + Garage rent + Automobile tax and license + Variable operating cost

= $5,020 + $2,600 + $1,300 + $680 + (24000*$0.12) = $12,480

Average cost per mile for owning and operating the car = $12,480 / 24000 = $0.52 per mile

Solution 2:

The relevant cost for decision of rent a car or use own car to go on an extended cross country trip for twe weeks are avoidable cost if Kristen rent a car to go on exteneded trip.

Therefore relevat costs for decision making are:

1. Variable operating costs

2. Garage rent