Speedy
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 147,000 miles during a year, the
average operating cost is 8.7 cents per mile. If a truck is driven only
98,000 miles during a year, the average operating cost increases to 9.6
cents per mile.
| Required: |
| 1. |
Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round
the "Variable cost per mile" to 3 decimal places and the "Fixed cost"
to the nearest dollar amount. Omit the "$" sign in your response.)
|
| 2. |
Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)
|
| 3. |
If a truck were driven 122,000 miles during a year, what total cost would you expect to be incurred? (Round the "Variable cost per mile"
to 3 decimal places. Round your intermediate and final answers to the
nearest dollar amount. Omit the "$" sign in your response.)
|
Explanation:
1.
| | Miles
Driven | Total Annual
Cost* |
| High level of activity | 147,000 | $12,789 |
| Low level of activity | 98,000 | 9,408 |
| |
|
|
| Change | 49,000 | $ 3,381 |
|
|
|
|
| * 147,000 miles × $.087 per mile = $12,789 |
98,000 miles × $.096 per mile = $9,408
|
|
Change in cost
| = |
$3,381
| = $.069 per mile |
| Change in activity | 49,000 miles |
| | |
| Total cost at 147,000 miles | $12,789 |
| Less variable cost element: 147,000 miles × $.069 per mile | 10,143 |
| |
|
| Fixed cost per year | $ 2,646 |
| |
|
|
3.
| | |
| Fixed cost | $ 2,646 |
| Variable cost: 122,000 miles × $.069 per mile | 8,418 |
| |
|
| Total annual cost | $11,064 |
| |
|
|
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