Kristen Lu purchased a used automobile for $25,100 at the beginning of last year
ID: 2567901 • Letter: K
Question
Kristen Lu purchased a used automobile for $25,100 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 $5,020. The car is kept in a garage for a monthly fee.
Kristen drove the car 24,000 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.) please type next to the questions double click or empty box
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Hint #1
Depreciation ($25,100 ÷ 5 years) $5,020 Insurance $2,600 Garage rent $1,300 Automobile tax and license $680 Variable operating cost $0.08 per mileExplanation / Answer
Kristen Lu Fixed Cost Per Mile 1) Depreciation= $ 5,020.00 Insurance $ 2,600.00 Garage Rent $ 1,300.00 Automobile Tax and License $ 680.00 Total Fixed Cost $ 9,600.00 Drove a car in last Year 24000 Miles Fixed Cost Per Mile=(Total Fixed Cost/Miles Run =($9600/24000) $ 0.40 Per Mile Fixed Cost Per Mile $ 0.40 Per Mile Variable Cost Per mile $ 0.08 Per Mile Average cost per mile of owning and operating the car=(Fixed cost Per mile+ Variable cost per mile)=(.40+.08) $ 0.48 Per Mile 2) Variable Operating cost Relevant Depreciation Irrelevant Automobile Tax Irrelevant License cost Irrelevant Insurance Cost Irrelevant 1) Relevant Cost: Cost which can be avoided are relevant cost.Variable cost are relevant cost it must be incurred only when Kristen drive a car. 2) Irrelevant Cost: Sunk cost are irrelevant cost i.e. the cost which cannot be avoided. 3) Dep is a sunk cost. Automobile tax,Licence cost ,Insurance cost would be incurred even Kristen drive her own car or rent a car so it is irrelevent costs for decision.
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