Question

Kristen Lu purchased a used automobile for $36,050 at the beginning of last year and incurred the following operating costs:

Depreciation ($36,050 ÷ 5 years)	$	7,210
Insurance	$	3,800
Garage rent	$	2,000
Automobile tax and license	$	990
Variable operating cost	$	0.12	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 $7,210. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 28,000 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.)

• Variable operating costsunchecked
• Depreciationunchecked
• Automobile taxunchecked
• License costsunchecked
• Insurance costsunchecked

Answer 1

1
Average fixed cost per mile	0.50	=(7210+3800+2000+990)/28000
Variable operating cost per mile	0.12
Average cost per mile	0.62
2
The costs relevant to decision are:
Variable operating costs
All other costs are fixed and irrelevant.