Question

We Deliver operates a fleet of delivery trucks in Halifax. Analysis shows that if a truck is driven 105,000 kilometres during a year, the average operating cost is 11.4 cents ($0.114) per kilometer. If a truck is driven only 70,000 kilometres during a year, the average operating cost increases to 13.4 cents ($0. 134) per kilometer.

 

Required:

Using the high- low method, estimate the variable and fixed cost elements of the annual cost of truck operation.

Answer 1

 

	Kilometers Driven	Total Annual Cost*
High level of activity	$105,000	$11,970
Low level of activity	$70,000	$9,380
Change	$35,000	$2,590

 

*105,000 kilometers × $0.114 per kilometer = $11,970

70,000 kilometers × $0.134 per kilometer = $9,380

 

Variable cost per kilometer:

Change in cost / Change in activity = $2,590 / 35,000 kilometers = 0.074 per kilometers

 

Fixed cost per year:

Total cost at 105,000 kilometers.......................................$11,970

 

Less variable portion:

   105,000 kilometers × $0.074 per kilometer...............  7,770

Fixed cost per year..................................................................$ 4,200

Variable cost per kilometer: 0.074 per kilometers

 

Fixed cost per year: $ 4,200