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.)
Variable cost per kilometer $
Fixed cost per year $
Requirement 2:
Express the variable and fixed costs in the form Y = a + bX. (Round the variable cost per kilometer to 3 decimal places. Omit the "$" sign in your response.)
Y = $ + $ X
Requirement 3:
If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? (Omit the "$" sign in your response.)
Total annual cost $
Work done so far:
HIGH :11.4 * 105,000 = 1,197,000
LOW: 13.4 * 70,000 = 938,000
Total Variable cost = 105,000 * 7.4 = 777,000
Fixed cost = 1,197,000 - 777,000 = 420,000

Answer 1

Answer:

1. $0.074 km

2. Total cost = $4,200 + 0.074x

3. $10,120

Explanation:

The computation of the fixed cost and the variable cost per hour using high and low method is seen below

Variable cost per hour = (High operating cost - Low operating cost) ÷ (High driven in kilometers - Low driven in kilometers),

Where,

High operating cost = 105,000 km × 11.4%

= $11,970

Low operating cost = 70,000 km × 13.4%

= $9,380

Hence,

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

= $2,590 ÷ 35,000 km

= $0.074 per km

Now, the fixed cost equal to

= High operating cost - (High driven in kilometers × Variable cost per km)

= $11,970 - (105,000 km × $0.074 )

= $11,970 - $7,770

= $4,200

2. The equation is as seen below;

Y = a + bx

Therefore,

Total cost = $4,200 + 0.074x

3. Y = a + bx

= $4,200 + 0.074 × 80,000

= $4,200 + $5,920

= $10,120