Question

PA6-2 Analyzing Break-Even Point, Setting Target Profit, Degree of Operating Leverage [LO 6-1, 6-2, 6-5] Russell Preston delivers parts for several local auto parts stores. He charges clients 0.90 per mile driven. Russell has determined that if he drives 2,100 miles in a month, his average operating cost is $0.60 per mile. If he drives 4,100 miles in a month, his average operating cost is $0.40 per mile. Russell has used the high-low method to determine that his monthly cost equation is: total cost = $1,420.00 + $0.19 per mile. Required: 1. Determine how many miles Russell needs to drive to break even. Break-Even Miles Miles 2. Assume Russell drove 2,500 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month. O Profit O Loss 3. Determine how many miles Russell must drive to earn $1,420.00 in profit. Target Miles - Miles |

Answer 1

1
Fixed costs	1420
Divide by Unit Contribution margin	0.71	=0.90-0.19
Break-even miles	2000
2
Profit, as miles is above 2000
3
Fixed costs	1420
Add: Profit	1420
Required Contribution margin	2840
Divide by Unit Contribution margin	0.71	=0.90-0.19
Target miles	4000
4
Contribution margin income statement
Sales revenue	2250	=2500*0.90
Variable costs	475	=2500*0.19
Contribution margin	1775
Fixed costs	1420
Income from Operations	355
b
Contribution margin	1775
Divide by Income from Operations	355
Degree of Operating leverage	5.00