Question

Exercise 2-12 Cost Behavior; High-Low Method [LO2-3, LO2-4) Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company's cost analyst has determined that if a truck is driven 120,000 miles during a year, 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 13.6 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.) Answer is complete but not entirely correct. Miles Driven 120,000 Total Annual Cost $ 1,392,000 High level of activity

Answer 1

High level activity

When Truck drive 120000 miles, cost per mile = 11.6 cents

So total cost = 0.116*120000 = $13920

Low level activity

When Truck drive 80000 miles, cost per mile = 13.6 cents

So total cost = 0.136*80000 = $10880

Variable cost per mile = (Total cost of high activity - total cost of low activity)/(high activity unit - low activity unit)

VC = (13920-10880)/(120000-80000) = $0.076

Fixed cost = 13920 - 0.076*120000 = $4800

	Miles Driven	Total annual cost
High level activity	120000	$13920
Low level activity	80000	$10880
Change	40000	$3040
Variable cost per unit	$ 0.076
Fixed Cost	$ 48000

3). So when truck drive 100000 miles

Total cost = 4800 + 100000*0.076 = $12400