Kristen Lu purchased a automobile for $8,000 at the begining of last year and in
ID: 2463303 • Letter: K
Question
Kristen Lu purchased a automobile for $8,000 at the begining of last year and incurred the following operating costs Depreciation ($8,000 -s- 5 years)................$1 600 Insurance....................................................$1, 200 Garage rent................................................$360 Automobile tax and license........................$40 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 $1,600. 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. 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? Explain. 3 Kristen is thinking about buying an expensive sports car to replace the car she bought last year. She would drive the same number of miles regardless of which car she owns and would rent the same parkinq space The sports car's variable operating costs would be roughly the same as the variable operating costs of her old car. However, her insurance and automobile tax and license costs would go up.What costs are relevant in estimating the incremental cost of owning the more expense car? Explain.Explanation / Answer
Answer:1 Calculation of the average cost per mile:
Fixed cost = 1600 + 1200 + 360 + 40 = 3200
Variable cost, @ .14 per mi x 10,000 miles = 1400
Total Cost = 3200+1400=4600
Average cost per mile=4600/10000=$0.46 /mile
Answer:2 The variable operating cost is relevant in this situation. The depreciation is not relevant because it is a sunk cost. However, any decrease in the resale value of the car due to its use is relevant. The automobile tax and license costs would be incurred whether Kristen decides to drive her own car or rent a car for the trip during spring break and therefore are irrelevant. It is unlikely that her insurance costs would increase as a result of the trip, so they are irrelevant as well. The garage rent is relevant only if she could avoid paying part of it if she drives her own car.
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