Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 43

When Does Buying a Gas Guzzler Make Sense? Gasoline prices increased and also fluctuated widely during 2007 and 2008, and car purchases fell, even for fuel-efficient cars. Many new cars were selling for a discount and/or special promotions including reduced interest rates on car loans. These discounts and promotions were especially prominent for SUVs and larger cars, those with the lowest gas mileage. The discounts and promotions were also prominent for used cars; in the used car market it was hard to find a fuel efficient vehicle, but SUVs and larger cars were in abundance.

Required You are shopping for a car for your youngest son who has just received his driver’s license. By clear agreement with your son, and because of local legal restrictions on new drivers such as those limiting the time of day they can drive, you do not expect the car to be driven many miles in the average month. Your son will be the only one allowed to use the car and he by agreement must purchase the gasoline for it. You will pay for insurance and for any mechanical repairs. Your criteria for the purchase of the car are first safety and then reliability and the cost of insurance. What type of car would you considera small fuel-efficient car or a large car?

Step 1 of 2

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production.