Question

Need a Hair Cut Ltd. operates a fleet of rental cars in Kingsvilli. The company has determined that if a car is driven 105,000 kilometres during a year, the average operating cost is 12.665 cents per kilometre. If a car is driven only 70,000 kilometres during a year, the average operating cost increases to 14.5 cents per kilometre. Note: Please do not round the decimal places of cost per kilometre, which is 12.665 and 14.5 cents per km.

Required:

1. Using the high–low method, estimate the variable and fixed cost elements of the annual cost of truck operation.
2. Express the variable and fixed costs in the form Y = a + bX.
3. If a rental car were driven 80,000 kilometres during a year, what total cost would you expect to be incurred?

Answer 1

		KM Driven	Average Op Cost	Total Cost
	High LEVEL	105,000	12.665	1,329,825
	Low Level	70,000	14.5	1,015,000
	Change	35000		314825
1)	Variable cost(Slope) = Change in Total Cost / Change in KM Driven
	=(314825/35000)
	8.995	Per km
	Total cost - Variable cost = Fixed cost
	1329825 - (105000*8.995) = Fixed cost
	Fixed Cost = $385,350
2)	y = $385,350 + 8.995 X
4)	Operating cost (80000 km ) = 80000*8.995 +385350
	1,104,950