Hollings Company sells and delivers office furniture in the Rocky Mountain area. The costs associated with the acquisition and annual operation of a delivery trucks are given below:

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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$1,600 Insurance $250 Licenses Taxes (vehicle) S150 Garage rent for parking (per truck) $1,200 $1 800* Depreciation ($9,000 - 5 years) Gasoline, oil, tires, and repairs S0.07 per mile *Based on obsolescence rather than on wear and tear.