Question

Hoi Chong Transport, Ltd. operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 126,000 kilometres during a year, the average operating cost is 14.0 cents per kilometre. If a truck is driven only 84,000 kilometres during a year, the average operating cost increases to 15.9 cents per kilometre. (The Singapore dollar is the currency used in Singapore.)

Required:

1.	Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost" to 3 decimal places.)

  

2.	Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost" to 3 decimal places.)

      

3.	If a truck were driven 94,000 kilometres during a year, what total cost would you expect to be incurred? (Round your intermediate calculations to 3 decimal places.)

  

Answer 1

SOLUTION

1.

Details	KM Driven	Per KM Cost	Total cost
High activity level	126,000	0.14	17,640
Low activity level	84,000	0.159	13,356
Change	42,000		4,284

Variable cost = Change in cost / Change in activity

= 4,284 / 42,000

= $0.102

Fixed cost = Total costs - Variable cots

= $17,640 - (0.102*126,000)

= $17,640 - 12,852 = 4,788

2. Y = a + bX

Total cost = Fixed costs + (Variable costs * Number of KM driven)

= $4,788 + (0.102 * Number of KM driven)

3. Total cost = Fixed costs + (Variable costs * Number of KM driven)

= $4,788 + (0.102 * 94,000)

= $4,788 + 9,588

= 14,376