Question

Rio Bus Tours has incurred the following bus maintenance costs during the recent tourist season. (The real is Brazil’s national monetary unit. On the day this exercise was written, the real was equivalent in value to 0.2545 U.S. dollar.)

Month	Miles Traveled by Tour Buses			Cost
November		15,450			18,900		real
December		17,700			19,200
January		19,950			19,350
February		24,300			19,800
March		31,800			21,000
April		13,800			18,300

Required:

 1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.

 2. Develop a formula to express the cost behavior exhibited by the company's maintenance cost.

 3. Predict the level of maintenance cost that would be incurred during a month when 47,000 tour miles are driven.

Answer 1

1.

Highest activity cost = 21,000 real

Lowest activity cost = 18,300 real

Highest activity = 31,800

Lowest activity = 13,800

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

= (21,000-18,300)/(31,800-13,800)

= 2,700/18,000

= 0.15 real per mile

Fixed cost = Highest activity cost - Highest activity x Variable cost per miles

= 21,000- 31,800 x 0.15

= 21,000-4,770

= 16,230 real

2.

Cost Fourmula

y = 16,230+ 0.15 X

Total cost = Fixed cost + Variable cost per mile x Activity miles driven

3.

Total Cost ,when 47,000 tour miles are driven= Fixed cost + Variable cost per mile x Activity miles driven

= 16,230+ 0.15 x 47,000

= 16,230+7,050

= 23,280 real