Exercise 2-12 Cost Behavior; Hig h-Low Method [LO2-3, LO2-4] Speedy Parcel Servi

Question

Exercise 2-12 Cost Behavior; Hig h-Low Method [LO2-3, LO2-4] Speedy 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 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 136 cents per mile Required: 18 2 Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost per mile" to 3 decimal places.) Driven Cost High ievel of activity Change Variable cost per mile per unit Fixed cost per year

Explanation / Answer

1&2)

Working note-

Cacluation of Annual cost

80,000 miles × $0.136 per mile = $10,880.

Calculation of variable cost

Change in Cost/change in Activity

=$3,040/40,000=0.076.

Calcuation of Fixed cost

3)

Miles Driven Total Annual cost High Level of activity 120,000.00 $             13,920.00 Low Level of activity 80,000.00 $             10,880.00 Change 40,000.00 $               3,040.00 Variable cost per Mile $               0.08 Fixed Cost Per Year $      4,800.00

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