Kristen Lu purchased a used automobile for $23,750 at the beginning of last year
ID: 2449671 • Letter: K
Question
Kristen Lu purchased a used automobile for $23,750 at the beginning of last year and incurred the following operating costs: 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 $4,750. The car is kept in a garage for a monthly fee. Required: Kristen drove the car 23,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.) 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 costsExplanation / Answer
1. Fixed Expenses per year are
Depriciation 4750
Insurance 2500
Garage Rent 1300
Automobile tax and license 650
Total 9200
Car was driven 23000 miles last year
, hence fixed cost per mile = Total fixed cost / miles driven
= 9200 / 23000
= 0.40
Hence
Fixed Cost per mile 0.40
Variable operating cost per mile 0.11
Average cost per mile 0.51
2. Costs which are relevant in the decision to rent a car or drive her own care are
1. Variable operating cost
All the other costs are fixed and will be incurred irrespective wheather the car is driven or not. Hence are not relevant to the decision
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