Question

Question one 4 points) 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. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation 2. If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred? - $ 11,970 bal annual cost= (High Kelemben é no longer cost -105,000 X 0.114 al annual cost-Clowest loweskitan X achwage operating =70,000 X 0.134

Answer 1

Answer to question one

1. High-Low method -

Particulars	Kilometers driven	Cost per Kilometer	Total Annual Cost
	(a)	(b)	(c) = (a) x (b)
High level of activity	105,000.00	0.114	11,970.00
Low level of activity	70,000.00	0.134	9,380.00
Change	35,000.00		2,590.00

1. Variable cost per kilometer         =             2,590/35,000

=             0.074

2. Fixed cost = Total cost less Variable cost

Cost for 105,000 kilometers:

Total cost             =             11,970.00 (as mentioned in the above table)

Variable cost      =             7,770.00 (105,000 Kilometers x 0.074)

Fixed Cost           =             4,200.00 (11,970.00 – 7,770.00)

Therefore, the variable cost per kilometer is 0.074 and total fixed cost is 4,200.00.

2. If a truck were driven 80,000 kilometers during a year, then total cost to be incurred:

1. Total variable cost    =             80,000 x 0.074

                              =             5,920.00

2. Total fixed cost        =             4,200.00 (as mentioned above)
3. Total cost (a + b)    =             5,920.00 + 4,200.00 = 10,120.00