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 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 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.)

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 80,000 kilometers during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations.)

Kilometers Total Annual Driven Cost High level of activity Low level of activity Change Variable cost per kilometer per kilometer Fixed cost per year

Explanation / Answer

1) kilometers total driven annual cost High level of activity 105,000 11970 low level of activity 70,000 9380 Change 35,000 2590 Variable cost per kilometer 0 per kilometer fixed cost per year 4,200 105,000 kilometers *0.114= 11970 70,000 kilometers * 0.134= 9380 Variable cost per kilometer = change in cost 2590 = 0.074 per KM change in activity 35,000 Fixed cost per year total cost at 105,000 kilometers 11970 less:Variable portion 105,000*0.074 7770 Fixed cost per year 4200 2) Y = a + bx Y= 4,200 + 0.074 X 3) fixed cost 4200 Variable cost 80,000*0.074= 5920 total annual cost 10120 answer

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