Question

Exercise 11-14 Identification of Relevant Costs [LO11-1] Kristen Lu purchased a used automobile for $12,300 at the beginning of last year and incurred the following operating costs: 2,460 s 1,300 Depreciation ($12,300 + 5 years) Insurance Garage rent Automobile tax and license 700 340 Variable operating cost 0.06 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 $2,460. 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. (Round your answers to 2 decimal places.) Average fixed cost per mile Variable operating cost per mile Average cost per mile

Answer 1

Answer 1

Depreciation	2,460
Insurance	1,300
Garage Rent	700
Automobile Tax & License	340
Total Fixed Cost	4,800
Total Kms	16,000
Average Fixed Cost per mile	0.30
Variable Operating Cost per mile	0.06
Average Cost per mile	0.36

Answer 2

Variable Operating Cost	Relevant
Depreciation	Irrelevant
Automobile Tax	Irrelevant
License Cost	Irrelevant
Insurance Cost (Note)	Irrelevant

Note: If the insurance is borne by the owner of the vehicle and not the one who rents the vehicle, Insurance cost will be relevant.