Question

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.57 per mile driven. Joyce has determined that if she drives 3,400 miles in a month, her total operating cost is $1,014. If she drives 5,200 miles in a month, her total operating cost is $1,302. Joyce has used the high-low method to determine that her monthly cost equation is: total monthly cost = $470 + $0.16 per mile driven. Required: 1. Determine how many miles Joyce needs to drive to break even. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.) 2. Calculate Joyce’s degree of operating leverage if she drives 5,400 miles. (Round your intermediate calculations to 2 decimal places and final answer to 4 decimal places.) 3. Suppose Joyce took a week off and her sales for the month decreased by 24 percent. Using the degree of operating leverage, calculate the effect this will have on her profit for that month. (Round your intermediate calculations and final answer to 4 decimal places. (i.e. .123456 should be entered as 12.3456%.))

Answer 1

Total monthly cost = $470 + $0.16 per mile driven
$470 is fixed cost and $0.16 is variable cost per mile driven
Selling price per mile driven	$               0.57
Less: variable cost per mile driven	$               0.16
Contribution margin per mile driven	$               0.41
Fixed cost	$                470
Divided by: contribution margin per mile driven	$               0.41
Break-even points (in miles driven) (Round to nearest whole number)	1,146
Sales revenue (5400*0.57)	$            3,078
Less: variable cost (5400*0.16)	$                864
Contribution margin	$            2,214
Less: fixed cost	$                470
Operating income	$            1,744
Contribution margin	$            2,214
Divided by: operating income	$            1,744
Degree of operating leverage	1.2695
Percentage decrease in sales	24%
Multiply: degree of operating leverage	1.2695
Percentage decrease in operating profit	30.4680%