Question

Assume that a company operates a fleet of taxi cabs. If a taxi is driven 80,000 miles during a year its average operating cost is 25 cents per mile. If a taxi is driven only 60,000 miles during the year, its average operating cost is 30 cents per mile. Using the high-low method, what is the estimated fixed cost per year? Multiple Choice $12,000 $8,000 O $10,000 $15,000

Answer 1

			Miles	Total
			Driven	Cost
High activity		80,000	20,000	(80,000*0.25)
Low activity		60,000	18,000	(60,000*0.30)
Change			20,000	2,000
Variable Cost per mile driven = Change in Cost / Change in Miles driven
			2,000 / 20,000 = 0.10 per mile driven
Estimated Fixed Cost:
Total cost at High activities of 80,000 miles	20,000
Less: Total Variable cost of 80,000 miles	8,000
Estimated Fixed Cost:		12,000
Answer is $ 12,000