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30 August, 19:32

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 114,000 kilometers during a year, the average operating cost is 12.7 cents per kilometer. If a truck is driven only 76,000 kilometers during a year, the average operating cost increases to 14.8 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 and Fixed cost answer to nearest whole dollar amount.)

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 95,000 kilometers during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations.)

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Answers (1)
  1. 30 August, 20:27
    0
    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 driven in kilometers - Low driven in kilometers)

    where,

    High operating cost = 114,000 km * 12.7%

    = $14,478

    Low operating cost = 76,000 km * 14.8%

    = $11,248

    So,

    = ($14,478 - $11,248) : (114,000 km - 76,000 km)

    = $3,230 : 38,000 km

    = $0.085 per km

    Now the fixed cost equal to

    = High operating cost - (High driven in kilometers * Variable cost per km)

    = $14,478 - (114,000 km * $0.085)

    = $14,478 - $9,690

    = $4,7882

    2. The equation is as follows

    Y = a + bx

    So,

    Total cost = $4,788 + 0.085X

    3.

    Y = a + bx

    = $4,788 + 0.085 * 95,000

    = $4,788 + $8,075

    = $12,863
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