Cost Behavior; High-Low Method 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 120,000 miles during a year, the average operating cost is 11 .6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.
Required:
I. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation.
2. Express the variable and fixed costs in the form Y= a+ bX.
3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?

Answer and Explanation:

The computation is shown below;

a. The variable and fixed cost elements is

The variable is

= (120,000 miles × 0.116) - (80,000 × 0.136) ÷ (120,000 - 80,000 miles)

= ($13,920 - $10,880) ÷ (40,000 miles)

= $0.076

Now the fixed cost is

= $13,920 - ($0.076 × 120,000)

= $4,800

b. The expression is

Y = $4,800 + $0.076X

c. The total cost is

= $4,800 + 100,000 × $.076

= $12,400

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