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The controller of the Trunk Company is preparing the budget for 2018 and needs to estimate a cost function for delivery costs

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Answer #1

Here we have to segregate the delivery costs into its fixed and variable portion.

therefore,

variable costs per mile = ($5400 - $4100)/(11000 - 6000)

= $1300/$5000 = $0.26 per mile

therefore,

fixed costs = $4100 - (6000 x $0.26)

= $2540

therefore,

(1)

cost function:

total cost = fixed costs + (variable costs per unit x number of units)

total cost = $2540 + ($0.26 x miles driven)

(2)

constant in the cost function denotes the fixed costs being incurred therefore it can be used as an estimate of fixed delivery cost per month.

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