Question

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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 1 Required 2 Required 3 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.) Y= < Required 1 Required 3 >

Answer 1

a.) As per high low method

Variable cost = difference in cost/ difference in untis(kilometer)

= 2,501,200-2,053,200/174,000-116,000

= 448,000/58,000

= 7.724 variable cost per kilometer

Calculation of fixed cost

Consider units of 174,000 kilometers

Variable cost = 174,000*7.724 = 1,344,000

Therefore fixed cost = 2,501,200-1,344,000 = 1,157,200

b.) Given total cost for driving a truck for 174,000 kilometers is

2,501,200

Therefore fixed cost + 174,000*variable cost per unit = total cost

I.e, 1,157,200+(174,000*7.724)

= 1,157,200+1,344,00

= 2,501,200

c.) Calculation of operating cost for 145,000 kilometers

= Fixed cost + variable cost

= 1,157,200+ (145,000*7.724)

= 1,157,200+1,120,000

= 2,277,200