Question

Russell Preston delivers parts for several local auto parts stores. He charges clients 0.90 per mile driven. Russell has determined that if he drives 2,100 miles in a month, his average operating cost is $0.60 per mile. If he drives 4,100 miles in a month, his average operating cost is $0.40 per mile. Russell has used the high-low method to determine that his monthly cost equation is: total cost

Answer 1

Answer:

Total cost=$1,640

Explanation:

Step 1: Calculate variable cost per unit

The variable cost can be calculated using the formula;

Variable cost=Total cost of high activity-total cost of low activity/highest activity units-lowest activity units

In our case;

Total cost of high activity=(0.4×4,100)=$1,640

Total cost of low activity=(0.6×2,100)=$1,260

Highest activity units=4,100

Lowest activity units=2,100

replacing;

Variable cost=(1,640-1,260)/(4,100-2,100)

Variable cost=380/2,000=0.19

Variable cost=$0.19 per mile

Step 2: Calculate fixed costs

Total cost=(Variable cost×units produced)+Total fixed cost

where;

Total cost=$1,640

variable cost=$0.19

units produced=4,100

Total fixed cost=c

replacing;

1,640=(0.19×4,100)+c

1,640=779+c

c=1,640-779

c=861

Total fixed cost=$861

Step 3: Construct total cost equation based on values above

Total cost=Total fixed cost+(variable cost×units produced)

Total cost=861+(0.19×4,100)=1,640

Total cost=$1,640