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	$	0.05	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.)

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

Computation of average cost per mile of owning and operating a car
Particulars	Amount
Depreciation	3350
Insurance	1700
Garage Rent	900
Automobile tax and license	450
Variable operating cost	800
Total cost	7200
Cost per mile = total cost/miles
7200/16000
0.45	per mile

note Variable operating cost = no of miles drove x variable cost i.e.,16000x0.05=800

2) Only Variable operating cost is relevant in this decision making , because all other costs are fixed costs that wont effect the decision making as that will not increase with increase in usage.