Question

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

Kilometer (i)	153,000	102,000
Average operating cost (ii)	0.125	0.154
Total operating costs (i) x (ii)	19,125	15,708

1.
Variable cost per kilometer = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)
= (19,125 - 15,708)/(153,000 - 102,000)
= 3,417/51,000
= $0.067
Annual Fixed cost = Highest activity cost - (Highest activity x Variable cost per kilometer)
= 19,125 - (153,000 x 0.067)
= 19,125 - 10,251
= $8,874

2.
Total operating cost = Fixed cost + Variable cost per kilometer x Number of kilometer
= 8.874 + 0.067X

3.
If a truck were driven 127,000 kilometers during a year, total operating cost would be = 8.874 + 0.067X
= 8,874 + 0.067 x 127,000
= 8,874 + 8,509
= $17,383

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