Question

Exercise 6A-3 Cost Behavior; High-Low Method [LO6-10]

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 153,000 kilometers during a year, the average operating cost is 12.5 cents per kilometer. If a truck is driven only 102,000 kilometers during a year, the average operating cost increases to 15.4 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 127,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

Total Operating cost
	Kms driven	Operating cost
High level of activity	153,000	$1,912,500
Low level of activity	102,000	$1,570,800
Change	51,000	$341,700
Variable operating cost per km =$341,700 / 51,000 =$6.70 per km driven
Fixed cost element =$1,912,500 - (153,000 km*$6.70)
Fixed cost element =$1,912,500 - $1,025,100 =$887,400
Y =$887,400 + $6.70X
Total Operating Cost at 127,000 Kms will be:
$887,400 + ($6.70*127,000) =$1,738,300