Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 111,000 kilometers during a year, the average operating cost is 12.2 cents per kilometer. If a truck is driven only 74,000 kilometers during a year, the average operating cost increases to 14.1 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 92,500 kilometers during a year, what total operating cost would you expect to be incurred?


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 per kilometer I per year Fixed cost

Answer 1

Kilometer (i)	111,000	74,000
Average operating cost (ii)	0.122	0.141
Total operating cost (i) x (ii)	$13,542	$10,434

1.
Variable cost per kilometer = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)
= (13,542 - 10,434)/(111,000 - 74,000)
= 3,108/37,000
= $0.084 per kilometer
Annual Fixed cost = Highest activity cost - (Highest activity x Variable cost per kilometer)
= 13,542 - (111,000 x 0.084)
= 13,542-9,324
= $4,218

Variable cost	$0.084	per kilometer
Fixed cost	$4,218	per year

2.
Total operating cost = Fixed cost + Variable cost per kilometer x Number of kilometer
Y = 4,218 + 0.084X

3.
If a truck were driven 92,500 kilometers during a year, total operating cost would be = 4,218 + 0.084X
= 4,218 + 0.084 x 92,500
= 4,218+7,770
= $11,988

Total annual cost = $11,988

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