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.
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?