4· The River Town Shuttle provides a water taxi across the St. Johns River for $

Question

4· The River Town Shuttle provides a water taxi across the St. Johns River for $4 per ride. It has provided the following data conceming its costs of operating its water taxi: January February Mach April Ma 4,100 2,600 $7475 $8,120 $11,130 $11,225 $7,390 May- # of riders 2,500 4,200 Operating costs Use the high-low method to answer the following: 1. Variable cost per rider 2. Fixed costs per month 3. Write the cost equation in good form. How many water taxi customers does RiverTown need to generate a profit of $4,190 per month? a. b.

Explanation / Answer

4.

A.

1.

The highest level of activity = 4200 riders and operating cost of $11130 (In the month of March)

The lowest level of activity = 2500 riders and operating cost of $7475 (In the month of January)

So,

Variable cost per rider = Difference in operating cost at highest and lowest activity / difference in riders

Variable cost per rider = (11130-7475)/(4200-2500) = $2.15

Variable cost per rider = $2.15

2.

Using lowest level of activity

Fixed cost = Operating cost – total variable cost = 7475 – (2.15*2500)

Fixed cost = $2100

3.

Cost equation will be as follows:

C = Fixed cost + total variable cost

C = 2100 + 2.15*Y

Here,

C = total cost

Y = no. of riders

B.

Net profit = total revenue – total cost

4190 = 4*Y – (2100 + 2.15*Y)

Y = (4190+2100)/(4-2.15)

Y = 3400 customers

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