Question

Exercise 2A-3 (Algo) Cost Behavior; High-Low Method (LO2-10] Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 90,000 kilometers during a year, the average operating cost is 9.1 cents per kilometer. If a truck is driven only 60,000 kilometers during a year, the average operating cost increases to 9.8 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 75,000 kilometers during a year, what total operating cost would you expect to be incurred? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.) Variable cost $ 7.700 per kilometer $ 126,000 per year Fixed cost

Answer 1

High - Low | Requirement 1 Particulars Total Cost Highest Level of Activity $ 8,190 Lowest Level of Activity $ 5,880 Difference $ 2,310 Kilometers 90,000 60,000 30,000 Determination of Variable Cost per Unit : Variable Cost per Unit = Cost at Highest Level of Activity - Cost at Lowest Level of Activity Hours at Highest level of Activity - Hours at Lowest Level of Activity Variable Cost per Unit = $ 8,190 - $ 5,880 90,000 Kms - 30,000 Kms Variable Cost per Unit = $ 0.08 Per Kilometer Determination of Fixed Cost : Units Produced 90,000 Variable Cost per Unit $ 0.08 Per Kilometer Variable Cost $ 6,930 Fixed Cost = Total Labor Cost - Total Variable Cost Fixed Cost = $ 8,190 - $ 6,930 Fixed Cost = $ 1,260 Per Year Total Fixed Cost Variable Cost Per Unit 1,260 $ 0.08 $ High-Low Requirement 2 Y = a + bx Y = Fixed Costs + Variable Cost per Unit * X Y = $ 1,260 + $ 0.08X High - Low Requirement 3 No. of Kilometeres 75,000 $ Fixed Cost Variable Cost 1,260 $ 5,775 $ Total Cost 7,035