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Kristen Lu purchased a used automobile for $25,100 at the beginning of last year and incurred the...

Question:

Kristen Lu purchased a used automobile for $25,100 at the beginning of last year and incurred the following operating costs:

Depreciation ($25,100/5 years) $5,020
Insurance $2,600
Garage rent $1,300
Automobile tax and license $680
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 $5,020. 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.)

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? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

Variable operating costs
Depreciation
Automobile tax
License costs
Insurance costs

Relevant Costs and Irrelevant Costs:

Relevant cost and irrelevant cost play an important role in decision-making. All costs which do not change with decision-making are called irrelevant costs. The costs which change with decision-making are called relevant costs.

Answer and Explanation:

1. Compute the average cost per mile of owning and operating the car as follows:

Particulars Amount Amount (e) Cost Per mile (e/24,000)
Total miles driven (a) 24,000
Fixed Cost:
Depreciation ($25,100/5 years) $5,020
Insurance $2,600
Garage rent $1,300
Automobile tax and license $680
Total Fixed Cost (b) $9,600 $0.40
Variable operating cost (per mile) $0.06
Total Variable cost (c) ($0.06 x 24,000) $1,440 $0.06
Total Cost (d = b + c) $11,040 $0.46


2. Determine relevant cost and irrelevant cost as follows:

Costs: Relevant (Irrelevant)
Variable operating costs Relevant
Depreciation Irrelevant
Automobile tax Irrelevant
License costs Irrelevant
Insurance costs Irrelevant


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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