Need a Hair Cut Ltd. operates
Need a Hair Cut Ltd. operates a fleet of rental cars inKingsvilli. The company has determined that if a car is driven105,000 kilometres during a year, the average operating cost is12.665 cents per kilometre. If a car is driven only 70,000kilometres during a year, the average operating cost increases to14.5 cents per kilometre. Note: Please do not round the decimalplaces of cost per kilometre, which is 12.665 and 14.5 cents perkm.
Required:
- Using the high–low method, estimate the variable and fixed costelements of the annual cost of truck operation.
- Express the variable and fixed costs in the form Y =a + bX.
- If a rental car were driven 80,000 kilometres during a year,what total cost would you expect to be incurred?
Answer:
| KM Driven | Average OpCost | TotalCost | |||
| High LEVEL | 105,000 | 12.665 | 1,329,825 | ||
| Low Level | 70,000 | 14.5 | 1,015,000 | ||
| Change | 35000 | 314825 | |||
| 1) | Variable cost(Slope) = Change in TotalCost / Change in KM Driven | ||||
| =(314825/35000) | |||||
| 8.995 | Per km | ||||
| Total cost – Variable cost = Fixedcost | |||||
| 1329825 – (105000*8.995) = Fixedcost | |||||
| Fixed Cost = $385,350 | |||||
| 2) | y = $385,350 + 8.995 X | ||||
| 4) | Operating cost (80000 km ) =80000*8.995 +385350 | ||||
| 1,104,950 | |||||
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