Question

The Jolly Transport Co. operates a fleet of delivery trucks in the Ft Lauderdale area. It has been determined that if a truck is driven 105,000 kilometers over a one year period the average operating cost is $0.114 per kilometer. If a truck is driven only 70,000 kilometers annually, the operating costs increases to $0.134 per kilometer. Required: In the space alotted below answer the following questions

a)    Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation.

b)    Using the formula Y=a + bX, present the fixed and variable costs.

c)    If a truck were driven 80,000 kilometers over a one year period, what total cost would your expect to be incurred?

Explain and solve all steps accordingly

Answer 1

Solution a:

Total operating cost at 105000 Kms = 105000 * $0.114 = $11,970

Total operating cost at 70000 Kms = 70000 * $0.134 = $9,380

Variable cost per Km using high low method = (Opearting cost at high level - Operating cost at low level) / (High level - Low level)

= ($11,970 - $9,380) / (105000 - 70000) = $0.074 per Km

Fixed operating cost = $11,970 - 105000 * 0.074 = $4,200

Solution b:

Presentation of fixed and variable cost in formula:

Y = $4,200 + 0.074X

Solution c:

Total cost to be incurred at 80000 Kms = $4,200 + 80000 * $0.074 = $10,120