Question

Hart Company sells and delivers office furniture across Western Canada.

The costs associated with the acquisition and annual operation of a delivery truck are given below:

Insurance	$	2,124
Licences	$	240
Taxes (vehicle)	$	136
Garage rent for parking (per truck)	$	1,360
Depreciation ($29,000 ÷ 5 years)	$	5,800
Gasoline, oil, tires, and repairs	$	0.26	/km

Required:
1. Assume that Hart Company owns one truck that has been driven 21,000 kilometres during the first year. Compute the average cost per kilometre of owning and operating the truck. (Round your answer to 2 decimal places.)

2. Not available in Connect.

3. Assume that the company decides to use the truck during the second year. Near year-end, an order is received from a customer over 1,000 kilometres away. What costs from the previous list are relevant in a decision between using the truck to make the delivery and having the delivery done commercially? (Round your answer to 2 decimal places.)

4. Occasionally, the company could use two trucks at the same time. For this reason, some thought is being given to purchasing a second truck. The total kilometres driven would be the same as if only one truck were owned. What costs from the previous list are relevant to a decision about whether to purchase the second truck?

Answer 1

Computation of average cost per kilometers

Insurance	2124
Licenses	240
Taxes	136
Garage Rent	1360
Depreication	5800
Total Fixed costs (A)	9,660
Total hours (B)	21,000
Fixed costs per hour (A/B)	0.46

Hence Total Cost = 0.46 + 0.26 = $ 0.72

2. Not Available.

3. Since the order is in addition to exisitng orders, Fixed costs are not relevant as they're recovered in existing sales. Thus, relevant cost = $ 0.26

4. Since variable costs vary on kilometere driven and not purchase of asset they're not relevant. Hence what is relevant is Fixed Cost.