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Accounting Question for Marginal/Differential Costs (not Financial Products): The average cost in 2015 of operating a...

Accounting Question for Marginal/Differential Costs (not Financial Products):

The average cost in 2015 of operating a domestically built motor bike are as below:

Particulars Average per km
Variable Costs:
Fuel Rs. 6.5
Maintenance Rs. 5.4
Tires Rs.0.7
Total Variable Cost Rs. 12.6
Fixed Costs:
Insurance Rs.1603
License, registration, taxes Rs.415
Depreciation Rs. 3782
Finance Charges (Assume a five-year loan at 6 percentage interest with a 10 percent down payment) Rs.741
Total Fixed Cost Rs. 6541

Assume that these costs are valid estimates of future costs. What are the differential costs in each of the following circumstances cited below?

(a) You own a typical domestic motor bike and has it registered. You are thinking about making a trip of 1000 km. What are the differential costs?
(b) You do not own a motor bike but are considering the purchase of the motor bike described above. If your estimate is that you will drive 10000 km per year for five
years and that alternative transportation will cost Rs. 4000 per year, should you do so?

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Answer #1
A Trip of 1000 kms
Fuel           6.50      6,500.00
Maintenance           5.40      5,400.00
Tyres           0.70          700.00
        12.60    12,600.00
B Purchase a Motor Bike-10000 Kms and transportation Costs
Insurance      1,603.00
License, registration, taxes          415.00
Depreciation      3,782.00
Transportation Costs      4,000.00
Finance Charges            741.00
Total Cost    10,541.00
Differential Cost (12600-10541)      2,059.00
It is advised to purchase bike
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