Hollings Company sells and delivers office furniture in the Rocky Mountain area.The costs associated with the acquisition and annual operation of a delivery truck are given below:Insurance ............................................. $1,600Licenses ............................................... $250Taxes (vehicle) ..................................... $150Garage rent for parking (per truck) ...... $1,200Depreciation ($9,000 5 years) .......... $1,800*Gasoline, oil, tires, and repairs ............ $0.07 per mile*Based on obsolescence rather than on wear and tear.Required:1. Assume that Hollings Company has purchased one truck that has been driven 50,000 miles during thefirst year. Compute the average cost per mile of owning and operating the truck.2. At the beginning of the second year, Hollings Company is unsure whether to use the truck or leaveit parked in the garage and have all hauling done commercially. (The state requires the payment ofvehicle taxes even if the vehicle isn’t used.) What costs from the previous list are relevant to thisdecision? Explain.3. Assume that the company decides to use the truck during the second year. Near year-end an orderis received from a customer over 1,000 miles away. What costs from the above list are relevant in adecision between using the truck to make the delivery and having the delivery done commercially?Explain.4. Occasionally, the company could use two trucks at the same time. For this reason, some thought isbeing given to purchasing a second truck. The total miles driven would be the same as if only onetruck were owned. What costs from the above list are relevant to a decision over whether to purchasethe second truck? Explain.
Hollings Company sells and delivers office furniture in the Rocky Mountain area.
The costs associated with the acquisition and annual operation of a delivery truck are given below:
Insurance ............................................. $1,600
Licenses ............................................... $250
Taxes (vehicle) ..................................... $150
Garage rent for parking (per truck) ...... $1,200
Gasoline, oil, tires, and repairs ............ $0.07 per mile
*Based on obsolescence rather than on wear and tear.
Required:
1. Assume that Hollings Company has purchased one truck that has been driven 50,000 miles during the
first year. Compute the average cost per mile of owning and operating the truck.
2. At the beginning of the second year, Hollings Company is unsure whether to use the truck or leave
it parked in the garage and have all hauling done commercially. (The state requires the payment of
vehicle taxes even if the vehicle isn’t used.) What costs from the previous list are relevant to this
decision? Explain.
3. Assume that the company decides to use the truck during the second year. Near year-end an order
is received from a customer over 1,000 miles away. What costs from the above list are relevant in a
decision between using the truck to make the delivery and having the delivery done commercially?
Explain.
4. Occasionally, the company could use two trucks at the same time. For this reason, some thought is
being given to purchasing a second truck. The total miles driven would be the same as if only one
truck were owned. What costs from the above list are relevant to a decision over whether to purchase
the second truck? Explain.
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