Question

Kallie Smith, owner of Flower Hour, operates a local chain of floral shops. Each shop has its own delivery van. Instead of charging a flat delivery fee, Smith wants to set the delivery fee based on the distance driven to deliver the flowers.Smith wants to separate the fixed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs.She has the following data from the past seven months:Month Miles driven Van Operating CostsJanuary 15,800 $5,460February 17,300 $5,680March 14,600 $4,940April 16,000 $5,310May 17,100 $5,830June 15,400 $5,420July 14,100 $4,880Use the high-low method to determine Flower Hour's cost equation for van operating costs. Use your results to predict van operating costs at a volume of 15,000 miles.Let's begin by determining the formula that is used to calculate the variable cost (slope).Now determine the formula that is used to calculate the fixed cost component.Use the high-low method to determine Flower Hour's operating cost equation.Use the operating cost equation you determined above to predict van operating costs at a volume of 15,000 miles.

Answer 1

Answer:

Use the high-low method to determine Flower Hour's cost equation for van operating costs.

• total cost = $1,355 + ($0.25 x total miles)

Use your results to predict van operating costs at a volume of 15,000 miles.

• total cost (15,000 miles) = $1,355 + ($0.25 x 15,000) = $5,105

Explanation:

Month                 Miles driven           Van Operating Costs

January                    15,800                        $5,460

February                  17,300                         $5,680

March                       14,600                        $4,940

April                         16,000                         $5,310

May                           17,100                        $5,830

June                         15,400                        $5,420

July                           14,100                        $4,880

high cost - low cost = $5,680 - $4,880 = $800

high cost - low cost = 17,300 - 14,100 = 3,200 miles

variable cost per mile = $800 / 3,200 miles = $0.25 per mile

total variable cost when driving 14,100 miles = 14,100 miles x $0.25 per mile = $3,525

total fixed cost = $4,880 - $3,525 = $1,355

total cost = $1,355 + ($0.25 x total miles)

total cost (15,000 miles) = $1,355 + ($0.25 x 15,000) = $5,105