Question

Assume that a company operates a fleet of limousines. If a limo is driven 80,000 miles during a year its average operating cost is 25 cents per mile. If a limo 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 variable operating cost per mile? Multiple Choice $0.12 O $0.15 $0.18 О O $0.10

Answer 1

Option (d) is correct

In high low method, the variable cost per unit is calculated by the following formula:

Variable cost per unit = Highest activity cost - Lowest activity ccot / Highest miles - Lowest miles

We have,

Highest miles = 80000

Highest activity cost = 25 * 80000 = 2000000

Lowest miles = 60000

Lowest activity cost = 30 * 60000 = 1800000

Now, putting these values in the above formula, we get,

Variable cost per unit = (2000000 - 1800000) / 80000 - 60000

Variable cost per unit = 200000 / 20000

Variable cost per unit = 10 cent per mile or $0.10 per mile