Question

Exercise 5A-3 Cost Behavior; High-Low Method [LO5-10] Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 93,000 kilometers during a year, the average operating cost is 9.2 cents per kilometer. If a truck is driven only 62,000 kilometers during a year, the average operating cost increases to 9.9 cents per kilometer. Required: 1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. 2. Express the variable and fixed costs in the form Y = a + bX. 3. If a truck were driven 77,500 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

Answer to Requirement 1:

If 93,000 kilometers are driven:

Average operating cost = Total operating cost / Number of kilometres driven
$0.092 = Total operating cost / 93,000
Total operating cost = $8,556

If 62,000 kilometers are driven:

Average operating cost = Total operating cost / Number of kilometres driven
$0.099 = Total operating cost / 62,000
Total operating cost = $6,138

Variable operating cost per kilometer = (Highest operating cost - Lowest operating cost) / (Highest kilometre driven - Lowest kilometre driven)
Variable operating cost per kilometer = ($8,556 - $6,138) / (93,000 - 62,000)
Variable operating cost per kilometer = $0.078

Fixed operating cost = Highest operating cost - Variable operating cost per kilometre * Highest kilometre driven
Fixed operating cost = $8,556 - $0.078 * 93,000
Fixed operating cost = $1,302

Answer to Requirement 2:

Total operating cost = $1,302 + $0.078 * Number of kilometres driven

Answer to Requirement 3:

Number of kilometres driven = 77,500

Total operating cost = $1,302 + $0.078 * 77,500
Total operating cost = $7,347