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 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 80,000 kilometers during a year, what total operating cost would you expect to be incurred?

Answer 1

If truck is driven for 105000 kms, total operating cost is 105000*0.114 = $ 11970

If truck is driven 70,000 kms total cost = 70,000*0.134 = $ 9380.

So by using high-low method we get Variable operating cost as => (11970-9380)/(105000-70000) = 0.074 $ or 7.40 cents per kms.

So Fixed costs => total cost - Variable cost

Ie., 9380 - (70,000*0.074) = 4200

Or 11970 - (105000*0.074) = 4200.

2. Total Cost be Y

And X be the units

So, equation is Y=4200 + ($ 0.074)X

3. X = 80,000 kms

So Y = 4200 + (0.074)*80000

= 10120.