Question

A lift fork truck is available at a cost of $28,000. The engineer estimates a 5-year life with a $2,000 salvage value at the end. The operating cost has been estimated to be $2,000 per month and the cost due to energy consumption is $90 per day. Estimate the fixed and variable costs for this lift fork truck in a period of one month. Company policy sets an 8% internal rate of return per year for such calculation and assumes that there are 26 working days in a month.

Answer 1

Step 1

• Fixed cost refer to the costs which do not vary with output and remain constant over periods of time eg - Depreciation
• Variable costs are the costs which change with output and will not occur if production is not done eg- Energy consumption cost

Step 2

Calculation of fixed Costs for one month

• The fixed costs will include the depreciation charged on the truck
• This will be calculated as follows for 1 year

= Cost of truck - Salvage value / Life of truck in years

= $28,000-$2,000/5

= $5,200

• Depreciation for 1 month = Depreciation for 1 year /12

=$5,200/12

=$433.33

Thus the fixed cost for one month is $433.33

Step 3

Calculation of Variable Costs for 1 month

• Variable costs include operating costs and Energy consumption costs
• Energy consumption cost per day = $90
• Number of days in a month = 26
• Thus energy consumption costs for 1 month = $90 x 26=$2,340

• Thus total variable cost for 1 month = Operating Cost + Energy consumption costs

= $2,000 + $2,340

= $4,340