Kristen Lu purchased a used automobile for $10,100 at the beginning of last year
ID: 2548895 • Letter: K
Question
Kristen Lu purchased a used automobile for $10,100 at the beginning of last year and incurred the following operating costs: Depreciation ($10,100 ÷ 5 years) $ 2,020 Insurance $ 1,100 Garage rent $ 600 Automobile tax and license $ 280 Variable operating cost $ 0.14 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 $2,020. The car is kept in a garage for a monthly fee. Required: 1. Kristen drove the car 10,000 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
Explanation / Answer
1) Total cost of owning and operating the car
= Depreciation+Insurance+Garage rent+Automobile tax and license+Variable Operating cost
= $2,020+$1,100+$600+$280+($0.14*10,000 miles)
= $2,020+$1,100+$600+$280+$1,400 = $5,400
Average cost per mile = Total cost/Total miles = $5,400/10,000 = $0.54 per mile
2) For making decision that whether to use own car or rent a car, only relevant cost for the decision should be considered. The relevant cost in this decision will be only variable operating cost and all other fixed cost such as depreciation, Automobile tax and license, insurance and garage rent are irrelevant for the decision. because depreciation is a non cash cost and insurance, garage rent, automobile tax and license will incurred irrespective of this decision.
Thus only variable operating costs are relevant in this decision.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.