Question

Hoi Chong Transport, Ltd. operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 170,000 kilometres during a year, the average operating cost is 14.1 cents per kilometre. If a truck is driven only 85,000 kilometres during a year, the average operating cost increases to 16.0 cents per kilometre. (The Singapore dollar is the currency used in Singapore.) Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost" to 3 decimal places.) Variable cost Fixed cost per kilometre per year 2. Express the variable and fixed costs in the form Y = a + bX(Round the "Variable cost" to 3 decimal places.) Y= 3. If a truck were driven 95,000 kilometres during a year, what total cost would you expect to be incurred? (Round your intermediate calculations to 3 decimal places.) Total annual cost

Answer 1

Kilometer (i)	170,000	85,000
Average operating cost (ii)	$0.141	0.160
Total operating cost (i) x (ii)	$23,970	$13,600

1.

Variable cost per kilometer = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (23,970 - 13,600)/(170,000 - 85,000)

= 10,370/85,000

= $0.122

Annual Fixed cost = Highest activity cost - (Highest activity x Variable cost per kilometer)

= 23,970 - (170,000 x 0.122)

= 23,970 - 20,740

= $3,230

2.

Total operating cost = Fixed cost + Variable cost per kilometer x Number of kilometer

Y = a + bX

Y = 3,230 + 0.122X

3.

If a truck were driven 95,000 kilometers during a year, total operating cost would be = 3,230 + 0.122X

= 3,230 + 0.122 x 95,000

= 3,230 + 11,590

= $14,820

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