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 120,000 kilometres during a year, the average operating cost is 11.6 cents ($0.116) per kilometre. If a truck is driven only 80,000 kilometres during a year, the average operating cost increases to 13.6 cents ($0.136) per kilometre.
Required:
1. 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 was driven 100,000 kilometres during a year, what total cost would you expect to be incurred?
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