Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 102,000 kilometers during a year, the average operating cost is 11.3 cents per kilometer. If a truck is driven only 68,000 kilometers during a year, the average operating cost increases to 12.9 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 85,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

1. Calculations are given below:

	Kilometers Driven	Total Annual Cost
High level of activity	102000	$11526
Low level of activity	68000	$8772
Change	34000	$2754
Variable cost per kilometer	$0.081	per kilometer
Fixed cost per year	$3264

Explanation:

Calculation of Total annual cost of high-level activity:

Total annual cost of high level activity = Number of kilometers driven * Average operating cost

= 102000 * 11.3%

= $11526

Calcualtion of Total annual cost of low level activity:

Total annual cost of low level activity = Number of kilometers driven * Average operating cost

= 68,000 * 12.9%

= $8772

Calculate Variable cost per kilometer:

Variable cost per kilometer = Change in total annual cost / Change in kilometers driven

= ($11526 - $8772) / (102000 - 68000)

= $2,754/ 34000

= $0.081

Calculation of Fixed cost per year:

Fixed cost per year = Total Cost - Variable Cost

Total cost at 102,000 kilometers	$11526
Less: Variable cost ( 102000 * $0.081)	$8262
Fixed Cost per year	$3264

2. Y = a + bX

Y = $3264+ $0.081X

3. Calculation of Total annual cost:

Total cost = Fixed cost + Variable cost

Fixed Cost	$3264
Variable Cost (85000 * $0.081)	$6885
Total annual cost	$10149

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