Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks.

Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 159,000 kilometers during a year, the average operating cost is 12.7 cents per kilometer. If a truck is driven only 106,000 kilometers during a year, the average operating cost increases to 15.8 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.

calculate variable cost ____ per km

caclculate fixed cost ________ per year

2. Express the variable and fixed costs in the form Y = a + bX.

3. If a truck were driven 132,000 kilometers during a year, what total operating cost would you expect to be incurred?

total annual cost =

Answer 1

d= d2-d1=159000-106000=53000 deference of driving

Total cost case 1= 159000*12.7=2019300

Total cost case 2= 106000*15.8=1674800

Difference of total cost= 2019300-1674800= 344500

Difference of driving= 159000-106000= 53000

Difference cost for one km( Variable Cost ) = 344500/53000=6.5

Fixed Cost =2019300 - ( 159000*6.5 ) =2019300-1033500=985800

Total Annual Cost for 132000 km => y= a+bx =985800+(132000*6.5)=985800+858000=1843800