Question

Exercise 2-12 Cost Behavior, High-Low Method [LO2-3, Lo2-4) Speedy Parcel Service operates a feet of delivery trucks in a large metropoitan area. A careful study by the companys cost enalyst has determined that if a truck is driven 120,000 miles during a yeer, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 136 cents per mile. Required: 1& 2.Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost per mile" to 3 decimal places.) 3 Answer is not complete. Total Annual Cost Miles Driven High level of activity Low level of actvity Change 120,000 S 1392,000 0 60,000 O 40,000 s 1392,000 Variable cost per per unt mle Fixed cost per year 3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?

Answer 1

Part 1 & 2

	Miles Driven	Total annual cost
High level of activity	120000	13920
Low level of activity	80000	10880
Change	40000	3040
Variable cost per mile	$0.076	Per unit
Fixed cost per year	$4800

120,000 miles × $0.116 per mile = $13920

80,000 miles × $0.136 per mile = $10880

Variable cost per mile = change in cost / change in activity = 3040/40000 = $0.076 per mile

Fixed cost per year:

Total cost at 120,000 miles	13920
Less variable cost element:
120,000 miles × $0.076 per mile	9120
Fixed cost per year	4800

Part 3

Fixed cost per year	4800
Variable cost (100000*0.076)	7600
Total annual cost	12400

Therefore,

Total annual cost

$12400