solution in detail. 1-32 Willie Lohmann travels from city to city in the con- du

Question

solution in detail.

1-32 Willie Lohmann travels from city to city in the con- duct of his business. Every other year he buys a used car for about 12,000. The auto dealer allows about 8000 as a trade-in allowance with the result that the salesman spends 4000 every other year for a car. Willie keeps accurate records, which show that all other expenses on his car amount to .223 per km for each km he drives. Willie's employer has two plans by which salesmen are reimbursed for their car expenses: (a) Willie will receive all his operating expenses, and in addition will receive 2000 each year for the decline in value of the automobile. (b) Willie will receive .32 per km but no operating expenses and no depreciation allowance. If Willie travels 18,000 km per year, which method of computation gives him the larger reimbursement? At what annual distance do the two methods give the same reimbursement?

Explanation / Answer

Answer:

1) If Willie travels 18,000 miles per year, which of the two plans gives him the larger reimbursement (without considering the tax consequences)

Solution: Plan A has larger reimbursement

Working:

Plan A: Reimbursement amount = .223*18000 +2000 = 6014

Plan B: Reimbursement amount = .32*18000 = 5760

Thus, Plan A has larger reimbursement

2) At what annual mileage do the two methods give the same reimbursement?

Solution: 20,619 miles

Working: Equation is 223*M + 2000 = .32*M

Thus, M = 2000 / (.32-.223)

M =20,619 miles

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