Average Cost: Average cost is the average amount of expense on a bunch of product for the given quantity. It is calculated by adding all the expenses and then dividing the total by the base. The base can be per unit, per mile, per liter. 1. To determine: To calculate the average cost per mile of owning and operating the car Solution: The fixed cost and variable cost per mile is already given in the problem, we need to calculate fixed cost per mile and add it to variable cost per mile to get the average cost per mile. Fixed cost per mile= Depreciation+Insurance+Garage rent+ automobile tax total miles = 1600 + 1200 + 360 + 40 10 , 000 = 0.32 Now average cost per mile can be calculated by adding fixed cost per mile with variable cost per mile. average cost per mile = fixed cost per mile + variable cost per mile = $ 0.32 + $ 0.14 = $ 0.46 Therefore, average cost per mile would be $0.46. Relevant Cost: Relevant costs are all those costs that are related to a specific decision and can affect the decision. It is also known as avoidable cost as it is incurred only when a particular decision is taken. 2. To determine: Finding the relevant costs Solution: In the given problem, only variable cost per mile is relevant cost as it is related specific to the current decisions. Depreciation , Insurance, automobile taxes and Garage rent are irrelevant costs. Conclusion: For decision making, only relevant costs matter as irrelevant costs does not help in incremental cost and benefit analysis. Relevant Cost: Relevant costs are all those costs that are related to a specific decision and can affect the decision. It is also known as avoidable cost as it is incurred only when a particular decision is taken. 3. To determine: relevant cost on new car For the new car, Kristen has to analyze what costs are going up and what costs are going down. The incremental effect on the costs would be the relevant cost here. Since, variable cost per mile remains the same; it is irrelevant for this decision. Depreciation is already a sunk cost. The increase in automobile taxes and insurance would be considered relevant cost for this analysis. Conclusion: relevant cost plays an important role in decision making and cost control. By focusing on relevant costs, an organization can take better decision and improve the organizational efficiency.

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