7. Identification of Relevant Costs Hart Company sells and delivers office furni

Question

7. Identification of Relevant Costs

Hart Company sells and delivers office furniture across Western Canada.

The costs associated with the acquisition and annual operation of a delivery truck are given below:

Required:

1. Assume that Hart Company owns one truck that has been driven 50,000 kilometres during the first year. Compute the average cost per kilometre of owning and operating the truck.

2. At the beginning of the second year, Hart Company is unsure whether to use the truck or leave it parked in the garage and have all hauling done commercially. (The government requires the payment of vehicle taxes even if the vehicle isn't used.) What costs from the previous list are relevant to this decision? Explain.

3. Assume that the company decides to use the truck during the second year. Near year-end, an order is received from a customer over 1,000 kilometres away. What costs from the previous list are relevant in a decision between using the truck to make the delivery and having the delivery done commercially? Explain.

4. Occasionally, the company could use two trucks at the same time. For this reason, some thought is being given to purchasing a second truck. The total kilometres driven would be the same as if only one truck were owned. What costs from the previous list are relevant to a decision about whether to purchase the second truck? Explain.

$1750 RIUILFHIRIIEUIISRESRRSUUI ....$ 150 Garage rent for parking (per truck).................$1350 $6000 Taxes(vehicle). Gasoline, oil, tires, and repairs

Explanation / Answer

Answer 1 Computation of average cost per kilometre of owning and operating the truck for first year Running = 50000 km for first year Total In $ Per Kilometer in $ Insurance 1750 0.035 Licenses 250 0.005 Taxes 150 0.003 Garage Rent for parking 1350 0.027 Depreciation 6000 0.12 Gasoline , oil,tires and repairs 0.16 Average cost per kilometer 0.35 Answer 2 Relevant cost for decision making - to leave the truck parked in the garage Total In $ Insurance 1750 Taxes 150 Garage Rent for parking 1350 Depreciation 6000 Answer 3 Relevant cost for decision making - to use the truck for delivery Total In $ Per Kilometer in $ Insurance 1750 0.035 Taxes 150 0.003 Garage Rent for parking 1350 0.027 Depreciation 6000 0.12 Gasoline , oil,tires and repairs 0.16 Average cost per kilometer 0.345 To make the order delivery done commercially , the company should recover minimum $345 from the order (1000 km * $0.345 per km) Answer 4 Relevant cost for decision making - purchase of second truck Assume the total running of second truck = 25000 km as yearly running is constant i.e.50000 km Total In $ Per Kilometer in $ Insurance 1750 0.07 Licenses 250 0.01 Taxes 150 0.006 Garage Rent for parking 1350 0.054 Depreciation 6000 0.24 Gasoline , oil,tires and repairs 0.16 Average cost per kilometer                                        0.54 If company purchases a second truck , the per kilometer cost will rise to $0.54 per km from present level $0.35 per km. It is advised not to purchase a second truck.

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