Question

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.50 per mile driven. Joyce has determined that if she drives 2,600 miles in a month, her total operating cost is $700. If she drives 5,100 miles in a month, her total operating cost is $950. Joyce has used the high-low method to determine that her monthly cost equation is total monthly cost = $440 + $0.10 per mile driven. Required: 1. Determine how many miles Joyce needs to drive to break even. 2. Calculate Joyce's degree of operating leverage if she drives 5,300 miles. 3. Suppose Joyce took a week off and her sales for the month decreased by 27 percent. Using the degree of operating leverage, calculate the effect this will have on her profit for that month. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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.) Break-Even Units Miles Required 1 Required 2 >

Answer 1

1) Break even unit = Fixed cost/ Contribution margin per unit = 440/(0.50-0.10) = 1100 Units

2) Contribution margin statement

Sales (5300*.50)	2650
Variable cost	530
Contribution margin	2120
Fixed cost	440
Operating income	1680

Degree of operating leverage = Contribution margin/Operating income = 2120/1680 = 1.26

3) Decrease by (27*1.26) = 34.02%