Question

Russell Preston delivers parts for several local auto parts stores. He charges clients $0.75 per mile driven Russell has determined that if he drives 3,700 miles in a month, his average operating cost is $0.70 per mile. If he drives 5,700 miles in a month, his average operating cost is $0.50 per mile. Russell has used the high-low method to determine that his monthly cost equation is total cost - $1,085 + $0.13 per mile. Required: 1. Determine how many miles Russell needs to drive to break even. 2. Assume Russell drove 2,000 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 $2.015 in profit 4-0. Prepare a contribution margin income statement assuming Russell drove 2,000 miles last month. 4-b. Use the information provided in Reg 4a to calculate Russell's degree of operating leverage.

Answer 1

Answer
1
Break even miles	1750	miles	1085/(0.75-0.13)
2
Profit
3
Target miles	5000	miles	(1085+2015)/(0.75-0.13)
4a
Contribution margin income statement
Sales revenue	$     1,500		2000*0.75
Variable costs	$        260		2000*0.13
Contribution margin	$     1,240
Fixed costs	$     1,085
Income from operations	$        155
4b
Degree of operating leverage	8		1240/155