Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 135,000 kilometers during a year, the average operating cost is 14.5 cents per kilometer. If a truck is driven only 90,000 kilometers during a year, the average operating cost increases to 18.1 cents per kilometer. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation.

Answer 1

Answer:

The variable and fixed cost elements of the annual cost of the truck operation is 0.073 and $9,720 respectively.

Explanation:

The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

Variable cost per hour = (High operating cost - low operating cost) ÷ (High kilometers driven  - low kilometers driven)

= (135,000 km × 14.5% - 90,000 km × 18.1 %) ÷ (135,000 km - 90,000 km)

= ($19,575 - $16,290) ÷ 45,000 km

= $3,285 ÷ 45,000 km

= 0.073

Now the fixed cost equal to

= High operating cost - (High service hours × Variable cost per hour)

= $19,575 - (135,000 km × 0.073)

= $19,575 - $9,855

= $9,720