Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer. Required:

1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.)

	Kilometers Total Annual Driven Cost High level of activity Low level of activity Change Variable cost per kilometer per kilometer Fixed cost per year

2. Express the variable and fixed costs in the form Y = a + bX. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.)

3. If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations.)

Answer 1

1)				kilometers	total
				driven	annual cost
	High level of activity			105,000	11970
	low level of activity			70,000	9380
	Change			35,000	2590
	Variable cost per kilometer			0	per kilometer
	fixed cost per year			4,200
	105,000 kilometers *0.114=				11970
	70,000 kilometers * 0.134=				9380
	Variable cost per kilometer =			change in cost		2590	=	0.074	per KM
				change in activity		35,000
	Fixed cost per year
	total cost at 105,000 kilometers					11970
	less:Variable portion 105,000*0.074					7770
	Fixed cost per year					4200
2)	Y =	a +	bx
	Y=	4,200	+	0.074	X
3)	fixed cost					4200
	Variable cost		80,000*0.074=			5920
	total annual cost					10120	answer