Question

We Deliver operates a fleet of delivery trucks in Halifax. Analysis shows that if a truck is driven 135,000 kilometres during a year, the average operating cost is 14.5 cents ($0.145) per kilometre. If a truck is driven only 90,000 kilometres during a year, the average operating cost increases to 18.1 cents ($0.181) per kilometre.

Required:

1. Using the high–low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Do not round your intermediate calculations. Round the Variable cost per kilometre to 3 decimal places and Fixed cost answer to nearest whole dollar amount.)

Answer 1

Solution : High low Method formala The formula for developing cost model using the high low resund is as follows: Vaciable coast bes unisa Highest activity Cost - lowest activity Cost - Highest activity emite-twest activity in duce, the vaciable cost per unit is determined then fined Cast can be calculated as under : By rising High cost : Fort Atectet fived costs = Highest achheity cost- (voiceble cost per unit x Highest activity vnits] oo By using low cost : fixed cost = lowest activity cost- (vaciable cost per mit x lowest activity mits) The fined cost calculated by any of above (lighet om will be same r The resulting Cost model after using the triph - low nethed would be as follows : Cost model a fixed cost t variable cost po x mit activity Here, the values given in question alla At Highest activity: Average operating cost = 14.5 cents ($0.145) Perkosa Ouit activity a 35000 km.

Vailable cost per unit = activity Huel Cost = Highest - suid Activity X Highest cuit Activity x o Averall operater cost av $ 0.145 Per ken = = activity 135000 km x 19575 At lowest Average operating cost = enes activity = lowest activity Cost a (Annual 18.1 centi (80-181) Pes ku 90ooo ten 9ooookmX $ 0.18) Piken 16290 By using the above formula faciable Cost per unit - Highest activity Cost - lowest activity cost Highest ativity unit - lowest activity unit 19575 - 16290 135000km - 90000 ken 3285 45000 = 0.073 Per kui fixed cost : (using the above formula) -) By using High Acttoity Cost = tighe acttvity Cost - Vacicekle cost per wuit x cuits) = 19575 -(0-073 x 135000) - 19575 - 9855 = 9720/- 2 By using low activity Cost a low activity cost - (V. Cost P. ux. = 16290-10.073 x 90000) = 16290 - 6570 activity cost a low also how activity with MU 9720 -

Therefore, the fixed Cost = $9720 & variable Cost = $0.073 Perken Units The Cost Model = fixed Cost & V.CP. V X = a + b X 5 $ 9720 + $0-073 * = , b= raciable lost p.o. ar x = fixed cost Duits.