Question

Really Fast Delivery Services has collected the following information about operating expenditures for its delivery truck fleet for the past five years: Year Miles Operating Costs 2013 110,000 $390,000 2014 140,000 $420,000 2015 100,000 $360,000 2016 130,000 $410,000 2017 170,000 $450,000 Using the high-low method, what is the cost estimate for fixed costs of Really Fast? (Round to ‘000, and choose the closest number.)

Answer 1

Answer

Fixed costs of Really Fast = $ 231,000

Calculations:

	Lowest range	Highest range
Cost	$       360,000	$        450,000
Miles	$       100,000	$        170,000

As per High Low Method,

Variable cost per hour = Change in costs / change in hours

Variable cost per Mile = (450,000-360,000)/(170,000-100,000)

Variable cost per Mile = 90,000/70,000

Variable cost per Mile = $ 1.28571428571429

Fixed Cost = Total Cost - Variable Cost

Fixed Cost = Total Cost - (Variable Cost per hour * hours)

Fixed Cost = 450,000-(1.28571428571429*170,000)

Fixed Cost = $ 231,428.571428571

Fixed Cost = $ 231,000 (rounded off)

In case of any doubt, please comment.