Question

Kristen Lu purchased a used automobile for $20,250 at the beginning of last year and incurred the following operating costs:

Depreciation ($20,250 ÷ 5 years)	$	4,050
Insurance	$	2,100
Garage rent	$	1,100
Automobile tax and license	$	550
Variable operating cost	$	0.08	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 $4,050. The car is kept in a garage for a monthly fee.

1. Kristen drove the car 26,000 miles last year. Compute the average cost per mile of owning and operating the car. (Round your answers to 2 decimal places.)

Average fixed cost per mile:______

Variable operating cost per mile:______

Average cost per mile:_______

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.)

• Variable operating costsunanswered
• Depreciationunanswered
• Automobile taxunanswered
• License costsunanswered
• Insurance costs

Answer 1

1.

Average fixed cost per mile	0.3
Variable operating cost per mile	0.08
Average cost per mile	0.38

2 . Relevant cost - Variable operating costs [ Rest do not apply for decision making]

Workings:

Depreciation	4050
Insurance	2100
Garage rent	1100
Automobile tax and license	550
Total fixed costs	7800
No of miles	26000
Average fixed cost per mile [ 7800/26000]	0.3