Kristen Lu purchased a used automobile for $8,350 at the beginning of last year
ID: 2594561 • Letter: K
Question
Kristen Lu purchased a used automobile for $8,350 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 $1,670. The car is kept in a garage for a monthly fee.
Kristen drove the car 11,000 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.)
Kristen Lu purchased a used automobile for $8,350 at the beginning of last year and incurred the following operating costs:
Explanation / Answer
ans)
1) Fixed cost per mile ($3300* ÷11000 miles) $0.3
Variable operating cost per mile 0.09
Average cost per mile $0.39
*Depreciation 1670
Insurance 900
Garage rent 500
Automobile tax and license 230
Total 3300
2)Variable operating costs --------- Relevant
Depreciation ---------- Irrelevant
Automobile tax --------- Irrelevant
License costs ----------- Irrelevant
Insurance costs --------- Irrelevant
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 costswould 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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