Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 135,000 kilometers during a year, the average operating cost is 14.5 cents per kilometer. If a truck is driven only 90,000 kilometers during a year, the average operating cost increases to 18.1 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.

The variable and fixed cost elements of the annual cost of the truck operation is 0.073 and $9,720 respectively.

Explanation:

The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

Variable cost per hour = (High operating cost - low operating cost) : (High kilometers driven - low kilometers driven)

= (135,000 km * 14.5% - 90,000 km * 18.1 %) : (135,000 km - 90,000 km)

= ($19,575 - $16,290) : 45,000 km

= $3,285 : 45,000 km

= 0.073

Now the fixed cost equal to

= High operating cost - (High service hours * Variable cost per hour)

= $19,575 - (135,000 km * 0.073)

= $19,575 - $9,855

= $9,720