Question

Community College and needs to supplement his income while Roger is a student at Tacoma going to school. Roger buys a new car and decides to be an Uber driver. The hours are flexible and the pay is reasonably good allowing Roger to go the school and work. Roger didn't drive much during March as he was on spring break. In addition, Roger drove less during May and December because he was studying for final exams. Uber requires Roger to pay a commission of 20 percent on all gross receipts Roger buys a new Hyundai Elantra SE for $25,000. Roger thinks the car will last four years and will have a residual value of $5,000. Roger plans to depreciate the car using straight-line depreciation. The car will be used 100 % for business. STLD the car; Roger keeps track of his expenses in three categories. Those categories are insurance on fuel costs; and other costs. The other category includes fixing of flat tires, oil changes, speeding tickets, car washes/detailing, cell phone with data, and auto maintenance oger ignores federal income taxes as a business expense and self-employment taxes as they are not reported as a business expense on his tax return. You are to ignore these costs in yo computations. Roger's gross receipts for the year were $62,500 Expenses paid with cash or credit card during the last year are as follows: $6,294 /LI76000. rana Fix Other Miles Driven Total Other Cost $460 ) fih 6153 anu February March 529 ri May June 4,892 1,629 5,478 690 400 706 49 ul 6,933 3,983 3,630 4,762 August September October November December 662 501 Total 47,600 Required Using the high-low method determine the portion of Other" costs that are fixed (rounded to the nearest dollar) and the variable cost per mile (rounded three decimal places). 0.0 72 Looking at all costs, what are the total variable cost per mile and the total fixed costs? Include cash and noncash annual expenditures in you analysis Using the results of#2 above,1f Roger drives 60,000 mile nextyearwithanestimated gross receipts of $78,782, what are the estimated total costs and average cost per mile? Prepare a contribution margin income statement for this year and next year. Calculate your income per mile. Explain your results in detail 3. 4.

Answer 1

Answer

• Few points to consider first:

--Auto Insurance is a fixed cost of $ 4439.
--Fuel expense of $ 6294 is a variable expense based on 47600 miles driven.
--Other cost is a MIXED cost, having elements of both-Fixed as well as variable cost.

• Requirement #1

	Months	Miles	Cost
High Level	Aug	6,933	$                         749.00
Low Level	Mar	1,255	$                         340.00
Difference		5,678	$                         409.00

Variable cost per miles = $ 409 / 5678 miles = $ 0.072 per miles

Fixed cost (at high level) = $ 749 - $(6933 miles x 0.072) = $ 250 approximately.

• Requirement #2

Fuel expenses	$                   6,294
Other Cost [Variable part: 47600 miles x $ 0.072]	$                   3,427
Commission [20% of $62500]	$                12,500
Total Variable cost	$                22,221
No. of miles	47600
Variable cost per mile [excluding commission] = (6294+3427)/47600	$                   0.204
Total Variable cost per miles driven [22221/47600]	$ 0.467

Total Other cost	$                   6,866
Less: Variable part [calculated above]	$                   3,427
Total FIXED other cost portion		$                 3,439
Auto Insurance		$                 4,439
Depreciable base of Car [25000 -5000]	$                20,000
Life of Car [years]	4
Annual Depreciation		$                 5,000
Total FIXED COST		$               12,878

• Requirement #3

Total Cost = ($0.204 x 60000 miles) + ($78782 x 20% commission) + $ 12878 fixed cost
= 12240 + 15756 + 12878
= $ 40,874

Average Cost per mile = $ 40874 / 60000 miles = $ 0.681 per mile

• Requirement #4

Contribution Income Statement

	This year	Next Year
Receipts	$   62,500.00	$        78,782.00
Variable costs:
Fuel and Other cost [Miles x $ 0.204]	$      9,710.40	$        12,240.00
Commission [Receipts x 20%]	$   12,500.00	$        15,756.40
Total Variable cost	$   22,210.40	$        27,996.40
Contribution margin	$   40,289.60	$        50,785.60
Total Fixed Costs [see requirement #2]	$   12,878.00	$        12,878.00
Net Operating income	$   27,411.60	$        37,907.60
Income per mile	$            0.576	$                0.632

--Round off accordingly.

--Next year Net Income has increased per mile even though miles driven has increased to 60000 miles.
--This is because the Fixed cost would stay the same as of current year.
--There has been increased in miles driven as well as Gross receipts in the next year.
--This has led to increase in Contribution margin next year.