Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 168,000 kilometers during a year, the average operating cost is 13.2 cents per kilometer. If a truck is driven only 112,000 kilometers during a year, the average operating cost increases to 16.7 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.)

Answer 1

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations.

1. Calculate variable cost per unit using the identified high and low activity levels

Variable cost = (Total cost of high activity – Total cost of low activity) / (Highest activity unit – Lowest activity unit)

((112,000 X .167) - (168,000 X .132)) / (168,000-112,000) = variable costs

2. Solve for fixed costs

To calculate the total fixed costs, plug either the high or low cost and the variable cost into the total cost formula.

It doesn't appear that you have enough information to answer this section. You need to know total cost to be able to answer this.

Total cost = (Variable cost per unit x units produced) + Total fixed cost

3. Construct total cost equation based on high-low calculations