Question

Hoi Chong Transport, Limited, operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 177,000 kilometers during a year, the average operating cost is 12.3 cents per kilometer. If a truck is driven only 118,000 kilometers during a year, the average operating cost increases to 15.5 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 147,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

Step-by-step explanation:

To use the high-low method, we need to find the difference in operating costs between the high and low levels of activity, and then divide that difference by the difference in activity levels.

Variable cost per km = (15.5 cents - 12.3 cents) / (118,000 km - 177,000 km)

Variable cost per km = -0.0005 cents

To find the fixed operating cost, we can use either of the activity levels and substitute in the variable cost per km we just calculated:

12.3 cents = Fixed cost + (177,000 km x -0.0005 cents)

Fixed cost = 210.6 dollars

So the estimated variable cost per kilometer is -0.0005 cents, and the estimated fixed cost is 210.6 dollars.

Expressing the costs in the form Y = a + bX:

Y = Total operating cost

a = Fixed cost = 210.6 dollars

b = Variable cost per km = -0.0005 cents

X = Number of kilometers driven

Y = 210.6 dollars - 0.0005 cents/km x 147,000 km

Y = 135.1 dollars

So if a truck were driven 147,000 kilometers during a year, the total operating cost would be approximately 135.1 dollars.