Question

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	$0.08 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

	Depreciation			5,020
	Insurance			2,600
	Garage rent			1,300
	Automobile tax and license			680
	total cost			9,600
1)	fixed cost per mile (9600/24000)				0.4
	Variable operating cost per mile				0.08
	Average cost per mile				0.48
2)	Variable operating costing			Relevant
	Depreciation			irrelevant
	Automobile tax			irrelevant
	license costs			irrelevant
	insurance costs			irrelevant