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high-low cost estimation assume the local yrc worldwide delivery service hub has the following information available about fleet miles and operating costs: year miles operating costs year 1 695,000 $219,500 year 2 855,000 267,500 use the high-low method to develop a cost-estimating equation for total annual operating costs. total annual costs

Respuesta :

The equation for total annual operating cost is given by the equation Total Cost = $11,000 - $0.3 * Fleet Miles

The high-low cost estimation model is used for separating the fixed cost from the variable cost if only the mixed cost data is on hand. Companies often use this method to develop the cost model used for predicting future costs.

First, we estimate the variable cost as

Variable Cost = (Cost at the highest activity level - Cost at the lowest activity level)/(Miles at the highest activity level - Miles at the lowest activity level)

Variable Cost = ($267,500 - $219,500)/(855,000 - 695,000) = $48,000/160,000 = $0.3 per fleet mile

Then, we estimate the fixed cost as

Fixed Cost = Cost at the highest activity level - Variable Cost * Miles at the highest activity level

Fixed cost = 267500- 0.3*855000 = 11000

Finally, the cost-estimating equation for the total annual operating costs can be formulated as

Total Cost = Fixed Cost - Variable Cost * Fleet Miles

Total Cost = $11,000 - $0.3 * Fleet Miles

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