Kristen Lu purchased a used automobile for $16,750 at the beginning of last year and incurred the following operating costs:

Kristen Lu purchased a used automobile for $16,750 at the beginning of last year and incurred the following operating costs:

Depreciation ($16,750 ÷ 5 years)	$	3,350
Insurance	$	1,700
Garage rent	$	900
Automobile tax and license	$	450
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 $3,350. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 16,000 miles last year. Compute the average cost per mile of owning and operating the car.

Explanation

1.

Average fixed cost per mile:  ($6,400* ÷ 16,000 miles) = $0.40

*Depreciation	$	3,350
Insurance		1,700
Garage rent		900
Automobile tax and license		450
Total	$	6,400

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