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16 January, 23:47

Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 135,000 kilometers during a year, the average operating cost is 14.5 cents per kilometer. If a truck is driven only 90,000 kilometers during a year, the average operating cost increases to 18.1 cents per kilometer. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation.

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  1. 17 January, 01:01
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    The variable and fixed cost elements of the annual cost of the truck operation is 0.073 and $9,720 respectively.

    Explanation:

    The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

    Variable cost per hour = (High operating cost - low operating cost) : (High kilometers driven - low kilometers driven)

    = (135,000 km * 14.5% - 90,000 km * 18.1 %) : (135,000 km - 90,000 km)

    = ($19,575 - $16,290) : 45,000 km

    = $3,285 : 45,000 km

    = 0.073

    Now the fixed cost equal to

    = High operating cost - (High service hours * Variable cost per hour)

    = $19,575 - (135,000 km * 0.073)

    = $19,575 - $9,855

    = $9,720
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