Question

Kristen Lu purchased a used automobile for $31,250 at the beginning of last year and incurred the following operating costs:

Depreciation ($31,250 ÷ 5 years)	$	6,250
Insurance	$	3,200
Garage rent	$	1,700
Automobile tax and license	$	850
Variable operating cost	$	0.15	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 $6,250. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 24,000 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 taxunanswered
• License costsunanswered
• Insurance costs

Answer 1

1. Calculation of cost per mile

PARTICULARS	Cost per mile
Fixed/ Standing charges
Depriciation ($6250/24,000 miles)	0.26
Garage rent ($1,700× 12/24,000 miles)	0.85
Insurance ($3,200/ 24,000 miles)	0.13
Automobile tax and license ($850/ 24,000 miles)	0.03
Variable costs	0.15
Total cost per mile	1.42

Cost of owning and running car is $1.42 per mile.

2. If she opts to take a car on rent for cross country trip then, she would be saving the Variable costs $0.15 per mile only. All other costs will be charged as they are.

If she opts to take her card with her then all costs will remain same. Including Variable cost