Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 156,000 kilometers during a year, the average operating cost is 12.6 cents per kilometer. If a truck is driven only 104,000 kilometers during a year, the average operating cost increases to 15.6 cents per kilometer. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places and Fixed cost answer to nearest whole dollar amount.) Kilometers Total Annual Cost Driven High level of activity Low level of activity Change 0 0 Variable cost per kilometer Fixed cost per year per kilometer 2. Express the variable and fixed costs in the form Y = a +bX. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.) 3. If a truck were driven 130,000 kilometers during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations.) Total annual cost

Answer 1

1.

Kilometer (i)	156,000	104,000
Average operating cost (ii)	$0.126	0.156
Total operating cost (i) x (ii)	$19,656	$16,224

	Kilometers driven	Total annual cost
High level of activity	156,000	19,656
Low level of activity	104,000	16,224
Change	52,000	3,432
Variable cost per kilometer	3,432/52,000 = $0.066	per kilometer
Annual Fixed cost	$9,360

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

= 19,656 - (156,000 x 0.066)

= 19,656 - 10,296

= $9,360

2.

Y = a + bX

= 9,360 + 0.066X

3.

If a truck were driven 130,000 kilometers during a year, total operating cost would be = 9,360 + 0.066X

= 9,360 + 0.066 x 130,000

= 9,360 + 8,580

= $17,940

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