Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The

Question

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 108,000 kilometers during a year, the average operating cost is 11.9 cents per kilometer. If a truck is driven only 72,000 kilometers during a year, the average operating cost increases to 13.7 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.) Kilometers Total Annual Driven Cost High level of Low level of activity Change per kilometer Variable cost per kilometer Fixed cost per year

Explanation / Answer

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(2)

Y = a + bX where Y: Fixed Cost, a: Total cost, b: Variable cost per KM & X: Number of KM

3,888 = a - 0.083X

(3)

X = 90,000

3,888 = a - 0.083 x 90,000

a = 3,888 + 7,470 = 11,358 (Total cost)

NOTE: First 3 questions are answered.

KM Average Cost ($) Total Cost ($) (A) (B) (C) = (A) x (B) High Activity 1,08,000 0.119 12,852 Low Activity 72,000 0.137 9,864 Change 36,000 2,988 Variable cost per KM ($): $2,988 / 36,000 0.083 Fixed Cost ($): [12,852 - (108,000 x 0.083)] 3,888

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