Prompt Parcel Service operates a fleet of delivery trucks in

Prompt Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company\'s cost analyst has determined that if a truck is driven 100,000 kilometres during a year, the average operating cost is 14.0 cents ($0.140) per kilometre. If a truck is driven only 60,000 kilometres during a year, the average operating cost increases to 16.0 cents ($0.160) per kilometre. Required: 1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of operating a truck if it is driven 100,000 kms. (Round intermediate values to 3 decimal places.) Variable cost Fixed cost 2. Express the variable and fixed costs in the form Y- a+bX. (Round \"Variable cost per kilometre\" answer to 3 decimal places.) 3. If a truck was driven 80,000 kilometres during a year, what total cost would you expect to be incurred? (Round intermediate values to 3 decimal places.) Total cost

Solution

1

High low method

Operating cost at 100,000 kms (A)

           14,000

Operating cost at 60,000 kms (B)

             9,600

Cost for 40,000 Kms (High low method) (C=A-B)

             4,400

Variable cost per unit (2,000/40,000)

$0.110

Fixed cost (9,600-(0.11*60,000))

$3,000

2

Variable and fixed cost in the form of Y=a+bX

Y=$3,000+$0.110X

3

If truck was driven 80,000 kms during the year, total cost would be

$11,800.000

(80,000*0.11)+3000

1	High low method
	Operating cost at 100,000 kms (A)	14,000
	Operating cost at 60,000 kms (B)	9,600
	Cost for 40,000 Kms (High low method) (C=A-B)	4,400
	Variable cost per unit (2,000/40,000)	$0.110
	Fixed cost (9,600-(0.11*60,000))	$3,000
2	Variable and fixed cost in the form of Y=a+bX
	Y=$3,000+$0.110X
3	If truck was driven 80,000 kms during the year, total cost would be	$11,800.000
	(80,000*0.11)+3000