Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.(The Singapore dollar is the currency used in Singapore.)Requirement 1:Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)

Answer 1

Answer:

variable cost = 0.074; fixed cost = 4,200

Explanation:

We will formulate (2) total cost equations in the form (TC = FC + VC * number of kilometres).

TC = Total cost for 105,000km at 11.4 cent average operating cost = 105,000 * 0.114 = $11,970.

TC for 70,000km at 13.4 cent = 70,000 * 0.134 = $9,380.

Therefore

(Equation 1): $11,970 = F + 105,000V

Equation 2): $9.380 = F + 70,000V

Using the high-low method, we will estimate "V" as follows.

($11,970 - $9,380) = (105,000 - 70,000)V

= $2,590 = 35,000V

= V = Variable Cost = $2,590/35,000 = 0.074.

From equation (1), we can deduce that F = 11,970 - 105,000V

= F = 11,970 - (105,000*0.074)

= F - Fixed Cost = $4,200.