Question

Chapter 6 Assignment i Saved Russell Preston delivers parts for several local auto parts stores. He charges clients $1.20 per mile driven. Russell has determined that if he drives 3,800 miles in a month, his average operating cost is $0.85 per mile. If he drives 5,800 miles in a month, his average operating cost is $0.75 per mile. Russell has used the high-low method to determine that his monthly cost equation is total cost = $1,600 + $0.56 per mile. 10 points Required: 1. Determine how many miles Russell needs to drive to break even. 2. Assume Russell drove 3,000 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month. 3. Determine how many miles Russell must drive to earn $2,000 in profit. 4-a. Prepare a contribution margin income statement assuming Russell drove 3,000 miles last month. 4-b. Use the information provided in Req 4a to calculate Russell's degree of operating leverage. eBook Print Complete this question by entering your answers in the tabs below. References Req 1 Req 2 Req3 Req 4A Req 4B Determine how many miles Russell needs to drive to break even. Break-Even Miles Miles Req 1 Req 2 >

Answer 1

Compute Break-even miles as follows: Service charge per mile Less: Variable cost per mile Contribution per mile (A) $1.20 ($0.56) $0.64 Fixed cost (B) Break even (B/A) $1,600 2500 Break even is the no profit or loss situation as computed in part 1. Breakeven miles (2500 miles). In the given case Russel drove 3,000 miles which is more than breakeven miles. Hence, they will eam profit.

Compute miles, if he eams $2000 profit. Fixed cost + desired profit Miles required to earn profit = Contribution per mile $1600+$2000 $0.64 =5.625 miles 4a Prepare a contribution margin income statement assuming Russell drove 3,000 miles: Sales Less: variable cost Contribution margin Mies 3000 3000 3000 rate/mile $1.20 ($0.56) $0.64 Amount $3,600.00 ($1,680.00) $1,920.00 Less: Fixed cost ($1.600) Income from operation | $320.00 46

Compute operating leverage as follows: Contribution margin Operating leverage, Income from operations $1920 $320 =6