Reference no: EM132857926

Question - Chichi purchased a used Honda CRV for RM8,000 at the beginning of last year and incurred the following operating costs:

Depreciation (RM8,000/5 years) RM1,600

Insurance RM1,200

Parking space fee RM360

Road tax and license RM40

Variable operating cost RM 0.14 per km

The variable operating cost consists of petrol, oil, tyres, maintenance and repairs. Chichi estimates that, at her current rate of usage, the car will have zero resale value in five (5) years, so the annual straight-line depreciation is RM1,600. Chichi pay the parking space for a monthly fee.

REQUIRED -

(a) Chichi drove the car 10,000 km last year. Compute the average cost per km of owning and operating the car.

(b) Chichi is unsure whether she should use her own car or rent a car to go on an extended cross-country trip for two (2) weeks during the mid-term break. Explain and identify which of the above costs are relevant and which are irrelevant in her decision.

(c) Chichi is thinking about buying an expensive sport car to replace the car she bought last year. She would drive the same number of km regardless of which car she owns and would rent the same parking space. The sport car's variable operating costs would be roughly the same as the variable operating costs of her existing car. However, her insurance and road tax and license costs would go up. Explain and identify which costs are relevant in estimating the incremental costs of owning the more expensive car.