Rapid Delivery, Inc., operates a parcel delivery service across the nation. The

Question

Rapid Delivery, Inc., operates a parcel delivery service across the nation. The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 150,000 miles per year the average operating cost is 10 cents per mile. This cost increases to 11 cents per mile if a truck is driven only 100,000 miles per year. Assume that all of the activity levels mentioned in this problem are within the relevant range. |Required: Using the high-low method, derive the cost formula for truck operating costs. Using the cost formula you derived above, what total cost would you expect the company to incur in connection with the truck if it is driven 130,000 miles in a year? $4,000 50,000 miles = $0.08 per mile variable cost Total cost at high level Less variable element: 150,000 miles x $0.08 Fixed element Cost formula: $3,000 plus $0.08 per mile or Y = $3,000 + $0.08X Variable cost: 130,000 miles x $0.08 per mile Fixed cost Total cost

Explanation / Answer

a) Cost at highest level of activity(150,000*.10)                             15,000.00 Cost at Lowest level of activity(100,000*.11)                             11,000.00 Highest level of activity                           150,000.00 Lowest Level of activity                           100,000.00 Variable cost per unit = (15,000-11,000)/(150,000-100,000) Variable cost per unit = 4,000/50,000 Variable cost per unit = .08 Fixed Costs = 15,000 - (150,000*.08) = 3,000 Cost Formula = 3,000 + .08x where x is no of miles B Costs at 130,000 Miles Variable Costs = 130,000*.08                             10,400.00 Fixed Costs                                3,000.00 Total costs at 130,000 Miles                             13,400.00

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