MOS Company sells and delivers appliances. The costs associated with maintaining

Question

MOS Company sells and delivers appliances. The costs associated with maintaining a delivery truck each year are:

Insurance

$2,500

Licenses

$125

Vehicle taxes

$150

Depreciation ($15,000/5 years)

$3,000

Gasoline

$ 0.05/mile

Tires

$ 0.02/mile

Repairs

$ 0.01/mile

A.   Assume that MOS has a delivery truck that is driven for 60,000 miles in one year. Compute the average cost per mile of owning and operating that truck.

B.   Assume that MOS decides not use the delivery truck and instead arranges for all deliveries that it has to make to be made by a commercial trucking company. (The state where MOS is located the payment of vehicle license and taxes even if the vehicle is not used.) What costs are relevant to a decision by MOS to use its truck for deliveries or to have a commercial trucking companies make deliveries?

Can you please go into details as much as possible, so that I can understand....thanks!

Insurance

$2,500

Licenses

$125

Vehicle taxes

$150

Depreciation ($15,000/5 years)

$3,000

Gasoline

$ 0.05/mile

Tires

$ 0.02/mile

Repairs

$ 0.01/mile

Explanation / Answer

A.

B.

Here, License cost and Vehicle taxes are to be paid by MOS for both the options. Thus, these two are irrelevant to the decision making process.

Besides, other cost such as insurance, cost of truck (depreciation) , gasoline , tires and repairs will play an important role. Here, company will evaluate the average cost of transportation and delivery of goods.

At a particular no of miles, if average cost of transportation per mile is less for delivery truck than the commercial trucking company then, delivery truck should be used. In opposite case, commercial trucking company will be used for the services.

For average cost calculation of delivery truck, all above cost will be considered. For average cost calculation of commercial truck company, insurance and depreciation will not be considered.

Items Cost Cost for 60000 miles in a year ($) Insurance $2,500 2500 Licenses $125 125 Vehicle taxes $150 150 Depreciation ($15,000/5 years) $3,000 3000 Gasoline $ 0.05/mile 3000 Tires $ 0.02/mile 1200 Repairs $ 0.01/mile 600 Total cost = 10575 Note: Total cost of Gasoline = cost of gasoline per mile * no. of miles = .05*60000 = 3000 Total cost of tire = cost of tires per mile * no. of miles = .02*60000 = 1200 Total cost of repair = cost of repair per mile * no. of miles = .01*60000 =600 total cost for 60000 miles = $10575 Average cost per mile = 10575 / 60000 = $.177 approx.

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