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 and fixed cost elements of the annual cost of the truck operation. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places and Fixed cost answer to nearest whole dollar amount.)

2. Express the variable and fixed costs in the form Y = a + bX. (Do not round your intermediate calculations. Round the Variable cost per kilometer to 3 decimal places.)

3. If a truck were driven 127,000 kilometers during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations.)

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facundobuzzetti facundobuzzetti · Answer 1 · 2020-07-19T02:47:27+02:00

Answer:

Instructions are below.

Explanation:

Giving the following information:

Highest cost= 153,000*12.5= $1,912,500

Lowest cost= 102,000*15.4= $1,570,800

To calculate the fixed and variable costs, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (1,912,500 - 1,570,800) / (153,000 - 102,000)

Variable cost per unit= $6.7

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 1,912,500 - (6.7*153,000)

Fixed costs= $887,400

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 1,570,800 - (6.7*102,000)

Fixed costs= $887,400

Now, we can formulate the cost formula:

Total cost= 887,400 + 6.7x

x= kilometers driven

Finally, the total cost of 127,000 kilometers.

Total cost= 887,400 + 6.7*127,000

Total cost= $1,738,300