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Willie Lohmann travels from city to city in the conduct of his business. Every other year he buys a used car for about $12,000. The auto dealer allows about $8,000 as a trade-in allowance with the result that the salesman spends $4,000 every other year for a car. Willie keeps accurate records, which show that all other expenses on his car amount to 22.3 cent per mile for each mile he drives. Willie's employer has two plans by which salesman are reimbursed for their car expenses:

(a) Willie will receive all his operating expenses, and in addition will receive $2,000 each year for the decline in value of the automobile.

(b) Willie will receive 32 cent per mile but no operating expenses and no depreciation allowance.

If Willie travels 18,000 miles per year, which method of computation gives him the larger reimbursement? At what annual mileage do the two methods give the same reimbursement?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M940210

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