Prompt Parcel Service operates a fleet of delivery trucks in a large metropolita
ID: 2608821 • Letter: P
Question
Prompt Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company's cost analyst has determined that if a truck is driven 100,000 kilometres during a year, the average operating cost is 14.0 cents ($0.140) per kilometre. If a truck is driven only 60,000 kilometres during a year, the average operating cost increases to 16.0 cents ($0.160) per kilometre. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of operating a truck if it is driven 100,000 kms. (Round intermediate values to 3 decimal places.) Variable cost Fixed cost 2. Express the variable and fixed costs in the form Y- a+bX. (Round "Variable cost per kilometre" answer to 3 decimal places.) 3. If a truck was driven 80,000 kilometres during a year, what total cost would you expect to be incurred? (Round intermediate values to 3 decimal places.) Total costExplanation / Answer
1
High low method
Operating cost at 100,000 kms (A)
14,000
Operating cost at 60,000 kms (B)
9,600
Cost for 40,000 Kms (High low method) (C=A-B)
4,400
Variable cost per unit (2,000/40,000)
$0.110
Fixed cost (9,600-(0.11*60,000))
$3,000
2
Variable and fixed cost in the form of Y=a+bX
Y=$3,000+$0.110X
3
If truck was driven 80,000 kms during the year, total cost would be
$11,800.000
(80,000*0.11)+3000
1
High low method
Operating cost at 100,000 kms (A)
14,000
Operating cost at 60,000 kms (B)
9,600
Cost for 40,000 Kms (High low method) (C=A-B)
4,400
Variable cost per unit (2,000/40,000)
$0.110
Fixed cost (9,600-(0.11*60,000))
$3,000
2
Variable and fixed cost in the form of Y=a+bX
Y=$3,000+$0.110X
3
If truck was driven 80,000 kms during the year, total cost would be
$11,800.000
(80,000*0.11)+3000
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