Kristen Lu purchased a used automobile for $18,000 at the beginning of last year and incurred the following operating costs:

Kristen Lu purchased a used automobile for $18,000 at the beginning of last year and incurred the following operating costs:

Depreciation ($18,000 ÷ 5 years)	$	3,600
Insurance	$	1,900
Garage rent	$	1,000
Automobile tax and license	$	500
Variable operating cost	$	0.11	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 $3,600. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 14,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)

 

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? Assume that there is no decrease in the resale value of the car due to its use. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

Explanation

1.

Average fixed cost per mile:  ($7,000* ÷ 14,000 miles) = $0.50

*Depreciation	$	3,600
Insurance		1,900
Garage rent		1,000
Automobile tax and license		500
Total	$	7,000

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.

 

Thanks