Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 171,000 kilometers during a year, the average operating cost is 13.5 cents per kilometer. If a truck is driven only 114,000 kilometers during a year, the average operating cost increases to 17.2 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

Answer 1

Answer:

1. Variable cost is $0.061 or 6.1 cents per unit

  Fixed Cost is $12,654

2. Y = $12,654 + $0.061X

3. $21,316

Explanation:

1.

Cost at 171,000 km = 171,000 x $13.5/100 = $23,085

Cost at 114,000 km = 114,000 x $17.2/100 = $19,608

High low method separates the fixed cost and variable cost using net of Highest activity level and Lowest activity level and net of their relevant costs.

According to High low method

Variable cost per unit = ( Highest activity cost - Lowest activity cost ) / ( Highest Activity - Lowest activity )

Variable cost per unit  = ( $23,085 - $19,608 ) / ( 171,000 - 114,000 )

Variable cost per unit  = $3,477 / 57,000

Variable cost per unit  = $0.061

Fixed operating cost = Total cost - Total Variable cost = $19,608 - ( 114,000 x $0.061 ) = $12,654

2.

Y = a + bX.

Y = Total cost

a = Fixed cost = $12654

b = Variable cost per unit = $0.061 or 6.1 cents

Y = $12,654 + $0.061X

3

Total Distance travelled = X = 142,000 km

Y = $12,654 + $0.061 ( 142,000)

Y = $12,654 + $8,662

Y = $21,316

Total Cost is $21,316