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Exercise 5A-3 Cost Behavior; High-Low Method [LO5-10] Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 174,000 kilometers during a year, the average operating cost is 13.8 cents per kilometer. If a truck is driven only 116,000 kilometers during a year, the average operating cost increases to 17.7 cents per kilometer. Required: 1. Using the high-low method, estimate the variable operating cost per kilometer and the annual fixed operating cost associated with the fleet of trucks. 2. Express the variable and fixed costs in the form Y = a +bX. 3. If a truck were driven 145,000 kilometers during a year, what total operating cost would you expect to be incurred? Complete this question by entering your answers in the tabs below. Required 2 Required 3 Required 1 If a truck were driven 145,000 kilometers during a year, what total operating cost would you expect to be incurred? (Do not round intermediate calculations.) Total annual cost Required 2 Required 3>

Answer 1

Using High-Low Method: 1) Operating Particulars Kilometer Cost High $2,401,200 [174000 x $13.8] $2,053,200 [116000 x $17.7] $348,000 174,000 Low 116,000 Difference 58,000 (174000-116000) ($2401200 $2053200) $6 Variable Cost per Kilometer (Difference in cost / Difference in Kilometers = $348000 / 58000 $6) When Kilometer is 174000, When Kilometer is 116000, Operating cost Less: Variable costs Operating cost Less: Variable costs $2,401,200 $2,053,200 ($696,000)116000 x $6] ($1,044,000) [174000 x $6] Fixed operating costs Fixed operating costs $1,357,200 $1,357,200 Estimated Operating cost Fixed Operating cost + (Variable Operating cost per Kilometer x No. of Kilometers) Therefore, 2) Total Operating cost $1357200 ($6 x No. of Kilometers)

Kilometer driven during the year 3) 145,000 $6 [As calculated in Part-1] Variable Cost per Kilometer Total variable operating costs $870,000 [145000 Kilometers x $6] Add: Fixed operating costs $1,357,200 [As calculated in Part-1] Estimated total operating costs $2,227,200 [$870000 $1357200]