Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 150,000 kilometers during a year, the average operating cost is 12.4 cents per kilometer.

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 150,000 kilometers during a year, the average operating cost is 12.4 cents per kilometer. If a truck is driven only 100,000 kilometers during a year, the average operating cost increases to 15.2 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 125,000 kilometers during a year, what total operating cost would you expect to be incurred?

Explanation

1.

	Kilometers Driven	Total Annual Cost*
High level of activity	150,000		$	18,600
Low level of activity	100,000			15,200
Change	50,000		$	3,400

* 150,000 kilometers × $0.124 per kilometer = $18,600

   100,000 kilometers × $0.152 per kilometer = $15,200

Variable cost per kilometer:

Change in cost	=	$3,400	=	$0.068 per kilometer
Change in activity		50,000 kilometers

Fixed cost per year:

Total cost at 150,000 kilometers	$	18,600
Less variable portion:
150,000 kilometers × $0.068 per kilometer		10,200
Fixed cost per year	$	8,400

3.

Fixed cost	$	8,400
Variable cost:
125,000 kilometers × $0.068 per kilometer		8,500
Total annual cost	$	16,900

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