Question

Exercise 6A-3 Cost Behavior; High-Low Method [LO6-10]

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 96,000 kilometers during a year, the average operating cost is 10.3 cents per kilometer. If a truck is driven only 64,000 kilometers during a year, the average operating cost increases to 11.5 cents per kilometer.

Required:

1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks.

2. Express the variable and fixed costs in the form Y = a + bX.

3. If a truck were driven 80,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

• High Low Working

Note:
units = Kilometers

		Units	Cost
High Level		96,000	$                988,800.00
Low Level		64,000	$                736,000.00
Difference		32,000	$                252,800.00
A	Difference in Cost		$                252,800.00
B	Difference in units		32,000
C = A/B	Variable cost per unit		$                             7.90
Working		High Level	Low Level
A	Total Cost	$              988,800.00	$                736,000.00
B	Total Units	96000	64000
C	Variable cost per unit	$                           7.90	$                             7.90
D = B x C	Total Variable cost	$              758,400.00	$                505,600.00
E = A - D	Total Fixed Cost	$              230,400.00	$                230,400.00

• Requirement 1
  Variable cost = $ 7.90 per kilometres
  Fixed Cost = $ 230,400
• Requirement 2
  Y = a + bX
  Y(total cost) = $ 230,400 + $7.90X
• Requirement 3

Y(total cost) = $ 230,400 + $7.90X
Total Operating cost = 230400 + (7.90 x 80000)
= 230400 + 632000
= $ 862,400 = Answer